What is a good NOI?

I see what people search on Google that brings them to my blog. This was a question yesterday that I thought begged for an answer.

First, let’s review what “NOI” is. It’s “Net Operating Income”, or what’s left over after you take in your rents and pay out all of your expenses, including property taxes, but not including mortgage payments or income taxes.

For example: Say you have a duplex where each unit brings in $2k / month. Let’s say the property taxes are $6k / year and the other expenses (property insurance, maintenance, utilities, etc.) are $10k / year. The rent is $2k x 2 = $4k / month x 12 = $48k / year. The expenses are $6k + $10k = $16k. So, the NOI is $48k – $16k = $32k / year.

Sounds good, right? Well, knowing the NOI number without know the price of the asset is kind of meaningless, and that’s the problem with the question that is the title of this piece.

Imagine you paid $5MM for an apartment building, all cash (so there’s no mortgage payment). If the NOI is $32k / year, the return on your $5M investment is $32k / $5M = 0.6%. 0.6% / year is a horrific return. [Note: Regular readers probably recognize this calculation as a CAP rate, which is NOI divided by price.]

Now imagine you paid $350k for that same asset. Now you’re making $32k on a $350k investment, or $32k / $350k = 9.1%. Getting to a 9.1% cash-on-cash return is pretty incredible!

Bottom line: Knowing the NOI alone is somewhat meaningless. You need to know what someone is asking you to pay for that NOI to figure out if you want to own it.