NOI, or Net Operating Income is a calculation to determine the approximate cash flow of an apartment or multifamily project by subtracting operating expenses from the gross operating income after subtraction of vacancy and credit losses.

The goal of the NOI calculation is to capture all of the operating expenses, subtracting them from rental income, and resulting in the cash flow after expenses.

Operating expenses can be grouped in many ways, and not everyone does this calculation the same way. But, an example list of operating expenses of an apartment or multifamily project would normally include:

Property Ownership Related Expenses

· Taxes, whether property, school or other taxes on property value or location

· Insurance to protect investment from fire, damage, theft and liability

· Licenses and permits to operate

Utilities or Fuel

· Electricity
· Natural Gas
· Water & Sewer
· Cable TV or Satellite TV services
· Trash removal

Maintenance & Repair

· Exterminating
· Landscaping
· Decorating
· Cleaning
· Pool/hot tub maintenance
· Grounds maintenance/snow removal
· Elevator services
· Parking lot cleaning and maintenance/repaving
· Maintenance supplies
· Repairs

Salaries & Management

· Contracted management services
· In-house management salaries
· Housekeeping and in-house landscaping services
· Office staff
· Security Services
· Bonuses and commissions
· Payroll taxes & other payroll burden
· Legal/accounting/professional

Advertising and Marketing

· Print and other media for advertising
· Marketing materials and design services

These comprise the Net Operating Income expenses without reserves for capital expenditures or reserves for improvements and remodel. Adding these reserves to the subtotal of those expenses listed above would result in the operating expenses. Subtract that total from the income from rents to get to the NOI, or Net Operating Income.

Using this NOI, the potential buyer of an apartment or multifamily property can do a cap rate calculation to help in valuation of the property.

Using the prevailing cap rate of recently-sold properties, the buyer can determine the approximate value of the property in relation to the asking price. As this NOI is the cash flow, the seller can also determine a probable asking price using the prevailing cap rate.

Lenders can also use this number to determine through DSCR, Debt Service Coverage Ratio, the amount to loan on the property in a purchase transaction.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

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