As a real estate professional serving investment clients, you need to be very familiar with all the methods of valuation of income properties. One of these is the calculation of Net Operating Income, as it is used with cap rate to determine the value of a property.

Here’s How:

Determine the Gross Operating Income (GOI) of the property:

• Gross Potential Income - Vacancy and Credit Loss = Gross Operating Income

Determine the operating expenses of the property. This would include expenses for management, legal and accounting, insurance, janitorial, maintenance, supplies, taxes, utilities, etc.

Subtract the operating expenses from the Gross Operating Income to arrive at the Net Operating Income. Using the example of a property with a gross operating income of $52,000 and operating expenses of $37,000, our net operating income would be:

• $52,000 - $37,000 = $15,000 Net Operating Income

Tips:

Be very careful to get all the operating expenses into the calculation. Missing expenses will increase net operating income and thus cause your client to overpay for the property based on valuation using cap rate. A company’s positive operating income after operating expenses are deducted, but before income taxes and interest are deducted is referred to as NOI (net operating income), while a negative value is called a net operating loss (NOL).

Make sure you have a good understanding of all operating expenses associated with the operation of income producing properties.

Operating Expenses are costs associated with the operation and maintenance of an income producing property.

Operating expenses include the following items:

• Accounting Expenses - Advertising - Attorney Fees - Insurance - Janitorial Services
• Landscaping - Leasing Commissions - Legal Fees - License Fees - Office Expenses
• Supplies - Pest Control - Property Management - Property Taxes - Repair Costs
• Resident Manager - Salary and Wages - Telephone - Trash Removal

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