Investment Analysis and Net Operating Income
via Understanding Net Operating Income in Commercial Real Estate
No one has a crystal ball. However, to “make your money when you buy”, real estate investment analysis requires a careful look at variables, perhaps most important being projected gross income, at the time of purchase.
Net Operating Income
The amount left over after subtracting expenses from gross income, Net Operating Income (NOI) is crucial. Using a formula known as IRV with the income capitalization approach, NOI helps us to find value as follows:
Net operating income (I) ÷ capitalization rate (R) = value (V)
To find NOI, use income and expense statements for the subject and similar properties to first estimate the potential gross income, then subtract vacancy and collection loss. From this, estimate expenses and subtract them from the effective gross income.
Cap (Capitalization) Rate
Similar to a rate of return, the capitalization rate is the percentage investors hope to get from an investment. With as little information as recent sales data for comparable properties, the formula used to find Cap Rate is as follows:
Net operating income (I) ÷ Sales price (V) = Cap rate (R)
Together with expert market knowledge, this analysis helps us make reasonable projections that help our clients make informed purchase decisions every time.
Reach out to us for a consultation, we look forward to serving you.
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