#netoperatingincome

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How to Properly Evaluate Real Estate Investment Returns | Key Metrics Explained

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How To Figure Out Net Operating Income

Determining the net operating income of your home as you are preparing to sell can be a confusing process. The last thing you want as you are preparing to move out of your home and hoping to move into a new home and dealing with all of the other hassles is trying to figure out something like net operating income. Luckily, you have places like this to go to that can help you figure out these questions with ease.

First, let’s look at what exactly net operating income is. Put simply, net operating income is the potential profit of a particular piece of real estate investment. The more detailed explanation goes on to point out that net operating income looks at underlying profitability of a piece of real estate before things like taxes and operating costs are considered. Figuring out the net operating income is typically done by the investors in order to figure out the value of the real estate. This is done to place a price on the property before it is sold, or it can be a tool by buyers to figure out a suitable offer when looking to make a purchase.

Now that we understand what net operating income actually is, let’s start discussing how you actually determine it. The actual calculation seems simple at first. Basically you are just subtracting any operating expenses from the revenue that is generated by the real estate. Once you have done that, you have your net operating income. But what do these things mean? What exactly is considered in the generated revenue? What is taken away when you take away operating expenses?

Let’s start with the generated revenue first. This can vary depending on the type of property. If you are talking about a home, then you are likely just talking about the value of the home. This is determined through a number of ways including the surrounding homes, the market, and so forth, and it results in a fair market price. When looking at a rental property, though, other things must be considered too. There is, of course, the actual revenue from the facility itself being rented. Along with that, there may be a number of other fees involved too. Parking and service charges are very common examples of these, but you might also have revenue from things like laundry, vending, and other facilities and amenities. After all of these things have been totaled up, you will have a positive number that constitutes the revenue generated by the property.

From that positive number, you need to subtract the operating expenses. Unlike the generated revenue, the operating expenses are not going to vary too much with the type of property, but there are some discrepancies. Property insurance and property taxes are two examples of operating expenses that will always be taken out of operating expenses. In the case of rentals, you might also need to consider janitorial services and the cost associated with those as well as the cost of property management. Utilities are sometimes also taken out of the operating expenses, but this is not always the case. A final example, repairs and maintenance, brings up an important distinction though. Most of these operating costs are points that can be debated and negotiated by the property owner and the investor or buyer or other party. For example, the owner may decide to go ahead and make any repairs before the net operating income is even determined. On the other hand, the repairs may be written into any negotiations between the owner and anyone else. All of these are contingent on the particular situation, so it is important to pay attention to this part of the net operating income equation in your particular situation.

Once you have determined the generated revenue and the operating costs, then you are ready to figure out the net operating income. Simply subtract the total operating costs, as have been agreed upon in your particular situation, from the generated revenue, and you have the net operating income. Understanding all of the intricacies can be difficult for even the most experienced investor, so it can be helpful to speak to an accountant or to a real estate agent to help you make sure that your calculations are correct.

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How To Calculate Net Operating Income

Net Operating Income is the potential profit of a real estate investment. It is used to determine the value of a piece of real estate that has rental income. Calculating the Net Operating Income is typically performed by sellers to determine a fair list price and it is used by buyers to calculate a suitable offer when considering a purchase.

The actual calculation seems simple at first. Basically you are subtracting the Operating Expenses of the property from the Gross Revenue that is generated by the real estate. Once you have done that, you have your Net Operating Income.

Gross Revenue When looking at a rental property, there are the actual rents the property brings in. Also there may be a number of other incomes sources such as parking, laundry, vending and late fees. After all of these figures have been totaled, you will have a positive number that constitutes the Gross Revenue generated by the property.

Operating Expenses The Operating Expenses are the costs it actually takes to operate the building on an annual basis. Capital improvements made to a property should not be included in the Operating Expenses. This is because major improvements such as putting in a new sidewalk is not something that needs to be done every year. The company hired to shovel the snow from the sidewalk every winter is an Operating Expense though. The owner’s mortgage should not be included in the Operating Expenses of the property either. This is an owner expense and not an Operating Expense of the building. The next owner could be a cash buyer so the current owner’s mortgage amount is not a valid expense to him. Therefore, the Operating Expenses are the reoccurring expenses of the property only.

Determining the Net Operating Income of a rental property is the ideal way to determine the value of an investment property. Understanding all of the figures can be difficult for even an experienced investor. Therefore, it is recommended that an investor speak to an accountant or to a real estate agent to insure their calculations are correct and they are getting the best deal on their investment property!