There are several commonly-used metrics that a real estate investor uses to analyze the potential of any given opportunity. We will start with some basics and then gradually move into some of the more advance concepts. To begin the series, we will talk about Net Operating Income.

Net Operating Income, or NOI for short, is a quick indicator to tell a REI how profitable this property is currently. This calculation does not take into consideration of any debt or mortgage, evaluating it completely based on its own factor. Here is the formula:

NOI = GSI – OE

Gross Scheduled Income, or GSI for short, captures all the incomes into this property. This typically includes rent income, but it may also include other predictable recurring income, like garage fee, storage fee, or even laundry income.

Operating Expenses, or OE for short, captures all the expenses into this property. This typically includes both fixed and variable expenses. Fixed expenses may include Property Tax, Property Management Fee, Insurance Premium, and/or HOA Fee. Variable expenses may include Utility Costs, Maintenance Costs., and/or other Miscellaneous Costs. Be aware that variable expenses often change monthly but we still try to estimate to the best of our knowledge.

When you subtract all your expenses from all your incomes, the result is the NOI. If you are investing for (positive) cash flow primarily, this NOI number is your first checkpoint to see if this opportunity makes sense financially or not. As a general rule of thumb, not only you need this NOI number to be positive, but it needs to hold enough buffer to account for any short term down fall, as well as a possible mortgage payment. (We shall cover mortgage payment in a subsequent post.)

Knowing the NOI is a good starting step to give us a clear perspective on the income vs. expense situation, and a much-needed step to get us closer to other metrics to further evaluate the opportunity.

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