The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
When calculating your NOI, or net operating income, on an apartment building asset, first tally up all of your operating expenses. This includes things like management costs, utility bills, contract services, and property taxes, but does not count improvements like installing a new roof or debt services. Once you have this number ready, subtract it from what you put into the bank from that property.
Richard Wilson: And how do you calculate NOI on an apartment building asset? Which is net operating income.
Brian Burke: Net operating income is simply taking all of the income that the property generates, and if you think of it like this – how much money did you put in the bank? That’s what we call the effective gross income. From that number, you’ll subtract all of the operating expenses, and operating expenses are things like property taxes, property management, contract services, utility bills, advertising, payroll – those items are all operating expenses, and that’s why they call this net operating income, because it’s really a function of what the operating income is. So, once you subtract all of those things, then you have the net operating income. What’s not included in net operating income, but is often confused with net operating income, is things like debt service. The cost of debt service is not part of net operating income, and neither are capital improvements. If you put on a new roof, that’s not counted, so it’s only operating expenses.
Richard: Okay, good to know.