How do I calculate the Net Operating Income of a property?
A. Net operating income is determined by subtracting vacancy amount and operating expenses from a property’s gross income. Operating expenses include the following items: advertising, insurance, maintenance, property taxes, property management, repairs, supplies, utilities, etc. Operating expenses do not include the following items: improvements such as a new roof, personal property such as a lawn mower, mortgage payments (debt service), income and capital gains taxes, loan origination fees, etc. Appraisers use the Income Approach, Cost Replacement and Market Comparison methods to estimate the value of property. The Income Approach utilizes the theory of Capitalization. Keep in mind, that the NOI does not take into account your mortgage payment (debt service) on the property. That number is used in another calculation process known as Debt Service Coverage Ratio.
