How to calculate the NOI of an asset in real estate is misunderstood by a lot of investors, new and seasoned.
These investors don’t understand it because they don’t have to!
This figure doesn’t play a large role in small deals like single-family and two to four-unit properties.
But to play the real estate game in a way that can create generational wealth, you need to calculate the NOI of your deal accurately.
“You Live and Die by the NOI,” I like to say.
This is the formula and information on NOI you need to invest in real estate in the big leagues.
First, what does NOI stand for exactly? It means the Net Operating Income of an asset.
This figure is used to assess the profitability of a property once you acquire it. You can see now how on a single-family or duplex this would be straightforward.
However, on the 32+ unit deals like I suggest in my book, How to Create Wealth Investing in Real Estate, you need to crunch some numbers.
I’ll lay it out for you step by step.
Steps to calculate net operating income (NOI)
This is the formula to calculate your deal’s NOI:
- Multiply the current rent of the property times the number of units of the deal.
- Take that number and multiply it by 12 (a year).
- You will then subtract 10% from that total to compensate for occupancy.
The number you get here is your net operating income. This number determines how much you can reasonably expect to pay for a property and how much debt a bank will give you for it.
Now that you know how to calculate the NOI of an asset, you’re on the right track to making some serious money in real estate. You should also check out my other article on calculating another important figure — Cap Rates.
And to 10X your real estate investing endeavors, watch my free training on how to dominate the game.