Steps to Calculate the Net Operating Income of Commercial Real Estate
Since the sole purpose of commercial property is to gain profits, property management service providers for Puerto Vallarta real estate follow the practice of providing detail-oriented financial statistics to the property owners.
What Exactly is NOI?
The Net Operating Income is the positive cash flow generated by commercial property in a year. it is calculated after subtracting all the expenses of the property from the benefits gained from it.
Here is a quick break-down of the way NOI is calculated.
Effective Rental Income (ERI)= (Rental Income-Vacancy and Credit Loss)
Once the ERI is calculated, after adding any other income generated by the property we get the Gross Operating Income (GOI)
Gross Operating Income= ERI+ Income from other sources
After getting the GOI value, subtracting the operating costs will give us the NOI of the particular property.
NOI= GOI- Operating costs.
From the formula, it can be established that the gross operating income must be greater than the expenses. This means that the vacancy and credit loss from the property must be kept as low as possible. Or if the income from other sources is sufficient to cover for the loses, things can still be on the bright side.
Breakdown of Individual Components
As the above-mentioned process for calculating the NOI of a property is explained through formulas. It can be further broken down into individual components for your ease.
- Rental Income—it is also known as the Potential Rental Income (PRI). In order to incorporate it into the system, it is assumed that the property is generating 100% rent i.e. every unit is occupied.
- Vacancy and Credit Loss—In order to calculate this term, you can use market backed data on the vacancy rate in your area and the average number of people who miss their lease payments.
- Other Income—this is the income the property will generate by renting out extra space to tenants. In some cases, billboards and parking space fee are added to this term.
- Operating Expenses—these expenses include different costs the property has to bear. From property management fee to commercial property taxes implemented by the government, everything is included in this column.
With better understanding of each term, you will be able to predict the outcome of the entire deal. If you are an investor, using market trends to calculate NOI will help you decide whether it is safe to purchase a particular property or not.