The Effect of NOI (Net Operating Income) on Property Value
October 9, 2009 Leave a comment
Income producing real estate, whether it is used as multi-family, retail, office or a combination (mixed use) is valued by investors for the annual cash available to the investor after subtracting the property expenses from the income from tenants.
That amount is the Net Operating Income, or NOI.
Other than increasing cash to your bank account, why is a strong NOI so important?
The reason is that real estate investors require a Return on Investment or ROI. When an investor is evaluating whether to purchase your property, your historical NOI is the “return.” The investor will expect a rate of return on their investment, that’s referred to as the capital rate or “cap rate.” With the known cash flow and expected return, the investor then calculates his own valuation of the property. For example, if the investor is expecting 10% return on the investment, your property would be valued at ten times the NOI.
Net Operating Income $80,000 / 10% required rate of return = $800,000 investor valuation
At Commercial Funding Network, we advise property owners, who plan to market or refinance their property, to keep careful records of each property’s actual income and expense. Reporting the accurate numbers on annual tax filings will strengthen the property owner’s position when negotiating with future buyers or lenders.
We have prepared a simple one page worksheet for property owners to self-calculate the property’s annual cash flow. That net number will also tell you how much in annual mortgage payments the property can support. Call us at 800-503-1972 and we can help you with any questions.
Today, many commercial property owners are boosting the property NOI, and value, by reducing energy expenses. Depending on the property’s location, energy savings projects may include state tax incentives. The end result is reduced expenses improving that Net Operating Income (NOI) to show potential investors or lenders. And, the project may be eligible for CFN financing.
Commercial Funding Network, Inc is based in Niskayuna, New York. Through a nationwide of participating funding sources, CFN arranges funding for income producing real estate, and energy savings projects. Visit CFN online at www.commercialfundingnetwork.com
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