Real Estate Investor & Entrepreneurs

photo credit: Shahrukh Hasan

Analyzing your commercial deals is the most basic of functions you will do when looking for a property.  Knowing how to do that analysis is critical to your future success.  You are trying to arrive at an accurate Net Operating Income (NOI).  One based on actual numbers not a performa.  The formula itself is relatively easy:

Rent – (Vacancy+Operating Expenses) = NOI

This is a simplified formula, but essentially the one you will use on every property.  Here are the steps I use to quickly weed out the properties that will not work or identify the ones that do.  You gather the following information:

1. Potential Rental Income (PRI): Determine gross income for property. All the money if you collected all the rents from all the units – 100%
2. Vacancy: Locations have market occupancy – occupancy for all properties in an area.  We use this as a vacancy number that we subtract from the PRI.
3. Credit Loss:  We also factor in that we will not always collect 100% of the rent for the tenants that are occupying the building.  All these figures will produce the the Effective Gross Income (EGI).  We add other income to this number.  Other income may be laundry service on the property or vending machines, etc.  This gives us our Gross Scheduled Income (GSI)
4. We subtract the Operating Expenses (OE)  from the GSI to get the NOI.  In the early stages of your property search you will not have access to a complete and accurate report on the operating income.  You will need to assume a number they confirm it through the Due Diligence process of buying the property.  There are two schools of thought when you assume the operating income.  45% or $3,000+ per unit.  I have heard both numbers from “Gurus”.  I look at both and take the higher number.  This will weed out a lot of properties but will highlight a very good property when one does drop out.

(PRI – (Vacancy + Credit Loss)) = EGI + Other Income = GSI – OE = NOI

Once you have the NOI you divide it by your own personal CAP Rate to get the value of the property.  I don’t buy properties with a CAP Rate of less than 10.5%.  So if I had a NOI of $100,000 the highest I would pay for the property would be  ($100,000/.105) = $952,381.  Now I can check that against the price of the seller and we either can begin negotiation or I move on to the net property.

This calculation, after using for a few dozen properties, will take you 10 minutes to run through.  We quick way to see if you are good to go or moving on to the next one.

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