Now, it’s time to focus on the Expenses associated with a complex. This is how our Annual Property Operating Data (APOD) or Financials will appear if we only looked at the Income section.Įffective Gross Income $197,520 (GPI – Vacancy + OI = EGI) Let’s assume that our annual Other Income in this example is $3,120. We add this income into our calculations to arrive at a value called ‘Effective Gross Income’ (EGI). Other types of Other Income can include vending machines or even cell phone towers. The most common form of Other Income is from on-site laundry facilities. The next factor we want to look at is ‘Other Income”. The vacant units will typically rotate throughout the year as tenants come and go. ($216,000 GPI x 10%) Keep in mind that even if you do have 3 units vacant the entire year to achieve this 10% annual rate, it may not actually be the same exact 3 units that are vacant. Therefore, if we assume that 3 units will be vacant every month for the entire year, we would reduce our Income by $21,600. However, economic vacancy can include a few factors such as a tenant leaving in the middle of the month (or night), a non-paying tenant or ‘incentives/concessions’ given to a tenant to induce them to move in such as ‘Free Rent’ or reduced rent for a certain period of time.įor this example, I’ll use the 10% vacancy factor. I will not be calculating economic vacancy in this calculation due to some of its complexities. If you have a 30 unit complex and 3 units are vacant, the vacancy is 10% (3/30 =. The second step in the equation is to determine the vacancy of the property, both physical and economic. Therefore, the GPI of this complex as an annual figure will be: 30 units x $600/month = $18,000/month x 12 months = $216,000 per year of Gross Potential Income.
NOI CALCULATION IN REAL ESTATE FULL
The GPI assumes that all apartments (100%) are rented at full market value even if some are actually vacant or discounted.įor our example, I will use a 30 unit apartment building that has all 2 bedroom, 1 bathroom units with market rents of $600 per month each. Both terms are used interchangeably within the industry. I start with the Gross Potential Rental Income (GPI) or Scheduled Gross Rental Income (SGI).
Basically, the formula is: Income -Expenses (other than debt service) = Net Operating Income.įirst thing, I determine the income generated by the property.
NOI CALCULATION IN REAL ESTATE HOW TO
We are going to start with a simplified version of how to arrive at the NOI of a property and then expand each category. More specifically, how NOI is calculated as it relates to an apartment building. I will be talking about the NOI of a property.
If you know 2 of the figures you can always figure out the third. They are Net Operating Income (NOI), Cap Rate (CR) and Asking Price or Purchase Price (PP). There are 3 figures that go hand-in-hand when trying to determine a commercial/apartment property’s value. REPORT #1: How to Determine the Net Operating Income (NOI) of an Apartment Complex
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