Net Operating Income Reprise

Net Operating Income or NOI.  The basic building block of financial analysis for investment property or businesses.  For the sake of our Kansas City real estate investors we’re gonna talk about NOI specific to owning rental property.  I’ve talked about it before on many occasions.  In fact, in September of 2007 I wrote Net Operating Income aka NOI on this very blog.  That should show you two things; 1) It’s an important topic.  2) I’ve been doing this real estate investor blog thing for quite a while now.

Net Operating Income is simply your Gross Scheduled Rents minus your expected vacancies minus any expenses that it costs to run and maintain the rental property.  Financing is not included.  Why?  Because everyone’s cost of financing is different.  That’s why.

See not too complicated.  Once you have your NOI you can then determine value.

For instance, you can find your debt coverage ratio by taking your NOI and dividing it by your debt service.  Want to know if you’ll get the financing on that new rental property before even the underwriter gets it?  Then have a strong debt coverage ration of at least 1.2 to 1.4.   And in today’s financial world I’d keep it closer to the 1.4 if at all possible.  Negative DCR?  Don’t even think about it.  But that’s a whole other blog for a whole other time.

For other definitions and explanations of NOI I invite you to visit Investopedia and/or Jeff Brown’s Bawldguy explanation which is a little more colorful.

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