| Pinehurst Southern Pines Real Estate Investor Resources |
| NOI - Net Operating Income - APOD |
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A property's NOI is a
necessary part of almost any formula used to determine the value of
investment property so it must be as close to a real number as possible.
The present value of well maintained income producing real estate is
always some multiple of it's Net Operating Income. For example: if the
present value of investment capital is 10%, a property with an NOI of
$6,820 might be worth about $68,820 to a new investor. They are generally broken down into the following seven categories:
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| Vacancy and Collection Losses |
| A rental property will not be occupied 100% of the time and landlords do not collect 100% of the money even when it is occupied. Some realistic allowance must be made for these losses. Real estate appraisers will often use a number between 5% and 10% of gross income. Professional investors ask to examine a seller's Schedule E from the previous two or three year's tax returns. If that isn't possible, they may research the market, select competing properties, and try to determine what real vacancy and collection losses are likely to be. |
| Capital Reserves |
|
Reserves for major replacement are often overlooked when calculating an NOI. It is the money that should be set aside each month to cover the cost of replacing such things as roofs, heating and air conditioning, parking lots or structures. A capital reserve account operates similar to the escrow or impound account for property taxes and insurance that is often required by lenders. The applicable percentage of gross revenue that should be set aside depends primarily on the age and condition of a property. |
| Property Management |
| Many small property owners do not consider management expense when they value property because they intend to manage it themselves. That concept is not realistic for many reasons, and should never be used to help justify paying too much for an investment property. A buyer should ask themselves if they intend to continue working for free for the next owner, or how they will deal with an injury or illness that forces them to hire a manager. |
| Maintenance |
| The costs of properly maintaining a property are almost always underestimated by small property owners and novice investors. The owner may do much of the work without charging his time to the property, and a new investor may believe he can do the same thing. You think you can replace a toilet control assembly for less than $10 if you do it yourself, while a licensed plumber would likely charge $75 or more. But, when you consider your time; not just actually doing the work, but the trip to verify the problem, the time picking up the part and driving to and from the job, how much is it really worth? Don't forget the cost of operating and insuring your vehicle or the purchase of tools. When considering the cost of maintenance, you must include the cost paying yourself, or someone else at market rates, to arrive at a realistic NOI. Note: the APOD form has maintenance and repair broken out in many different categories so that an experienced investor or property manager can easily spot potential deferred maintenance problems and what may be missing or misinformation. |
| Utilities |
| If any are paid by the owner, they are a deductible operating expense. |
| Taxes |
| Property taxes are a NOI deduction, income taxes are not. |
| Insurance |
| Both the normal property insurance premiums and any additional liability umbrellas you may carry are included in operating expenses. |
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