Net Operating Income Made Simple

“Net Operating Income is everything in multifamily in my opinion.” – Dan Krueger  

Agree? Yes or NOI?

Okay, bad puns aside, whether or not it’s everything is debatable, but it’s certainly SUPER-important!

In today’s lightning round of Multifamily Investing Made Simple in Under 10 Minutes, we’re breaking down the Net Operating Income.

You’re going to learn:

1) Why’s it so important to the value-add multifamily investing model.

2) How to calculate it.

3) How just improving the net operating income by a couple dollars can lead to a huge BOOST in returns.

We’re going to do all that and more (more meaning we’ll make a couple dumb jokes you’ll surely enjoy) in under 10 minutes!

Tune in and don’t forget to subscribe and leave a REVIEW!

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Link to the full episode in the comments, by the way!

Tweetable Quotes:

“Net Operating Income is everything in multifamily in my opinion.” – Dan Krueger  

“You spend a dollar and you’re going to get two, three, maybe four dollars back in valuation for every dollar you spent.” – Dan Krueger

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Anthony Vicino (00:00):

Hello and welcome to multifamily investing made simple in under 10 minutes today, we are simplifying net operating income in under 10 minutes, and we’ve already wasted about 32 seconds. So let’s get right into it. Dan, what is the net operating income and why do we care about it?

Dan Krueger (00:34):

Net operating income is everything in multi-family, in my opinion, it’s what the value of the buildings based off of. So that’s going to be a huge factor in anything that you’re looking at single family world. We look at comps to try to figure out what something’s worth in multifamily and started like a business. So if you’re going to buy a McDonald’s, it doesn’t really matter so much where it is. It’s more so how many burgers do you sell? Because that’s what you’re buying. You’re buying a machine that produces cash flow and the more cash flow produces, the more its worth to you and NOI is the key number we use to figure out that valuation.

Anthony Vicino (01:09):

Yep, so let’s get into the definition here in a Y equals all revenue from the property minus all operating expenses. The key there is the operating expenses. This does not include things such as our debt service or capital expenditures or depreciation amortization, any of that stuff. This is just, what does it cost to run the business? So very simply we’re going to take all the income, all the revenue we generate each month, that’s going to be our rental income. It’s going to be our laundry, our parking. If we depart, if we do that it’s going to be our pet fees or our late fees, all of that income. And then we’re going to subtract from it. All of our expenses, those are going to be things like our repairs and our maintenance or utilities are administrative overhead pan, all those construction workers and what not to get the job done. So what’s left over after our revenue and expenses have been accounted for that is our net operating income. A lot of people would refer to that maybe as just your profit.

Dan Krueger (02:10):

Yeah. Net income net operating income. I think the key there is that the operating expenses, which you just mentioned are just the regular reoccurring things that come up in the course of business with real estate. Not the one-off things that happen every so often. So you can kind of equate this to you, your household budget on a monthly basis. You don’t plan to replace your roof, right? But you do plan to pay your taxes, play repair utilities pay for any maintenance and repairs. Those are all the operating expenses and those larger one-off items that are infrequent. And non-reoccurring in nature are going to be capital expenditures, which we’ll get into in a different episode. But for this, it’s just that stuff that happens either monthly, quarterly, or once a year with the, I guess, twice a year with property taxes, at least where we’re, we do two a year with that, but just that normal operating stuff, not the big improvements that you’re doing or anything, any structural changes or very large non-frequent repairs like boilers roofs when those things break need to be replaced, those are not operating expenses.

Anthony Vicino (03:17):

So those are what they call below the line, which we’ll get into in other episodes for the sake of this conversation, though, as Dan mentioned at the beginning, and why is the most important aspect of value add multifamily? Because unlike single families or small residential properties, the buildings valuation is derived as a function of the formula net operating income divided by the capitalization rate. And that gives you your building’s value. So when you go, when you buy a building, you have the ability to increase its value by increasing its revenue, B decreasing its expenses or C doing both. And if you could do both of those, then you’ve just added a tremendous amount of value. So that’s why we liked the NOI so much.

Dan Krueger (04:00):

And I think the most exciting part about it before we wrap this one up is that there’s an asymmetric relationship between how much capital you put into improve a property and the value that gets produced on the other end. Meaning if you spend a dollar improving the property, you’re going to get more than a dollar back in value or equity or appraised value, whatever you want to call it. So, you know, that’s the keys, you get leveraged there, you spend a dollar and you’re going to get two, three, maybe $4 back in evaluation for every dollar you spend. Because the cap rate, I mean, it really depends on the cap rate. The cap rate is ridiculously low. You might just get a dollar back. But as the cap rate goes up, you get more and more bang for your buck as far as how much value shows up as a product of that increase in A Y.

Anthony Vicino (04:48):

Now, when you said low cap right there, and we’re getting into the weeds a little bit here, what you meant was like a higher percentage cap rate, right? Like the higher, the number. Yep. It’s an inverse relationship, as you would think.

Dan Krueger (04:59):

Yeah, exactly. So, you know, as the market gets worse, right. As that cap rate increases.

Anthony Vicino (05:05):

Awesome. So that is net operating income in under 10 minutes. In fact, we still have another three minutes just to sit here and twiddle our thumbs. While you finish your commute to work, we’ll just sit here quietly and sing you some songs in the meantime. Well, that’ll do it for us over here at multifamily investing made simple in under 10 minutes. If you’re watching this on camera, I tried to put up 10 fingers, but I had things in my hand. So I put up two fists and it made no sense before you leave, do us a favour, head over to iTunes, Spotify, wherever you’re listening to this. And please just leave us a review, helps a ton. Seriously. I cannot stress this enough. It helps us so very, very much. Your words are oxygen. We appreciate you guys for listening and we’ll catch you Next week.

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