So you’ve come back and you want more information on really what is the net operating income and what are the different elements that are part of it? Well, in this video, I’m going to break it down for you.

Lots of you have been asking me after one of the most successful videos we’ve ever had is What is Net Operating Income, you really wanted to know more about what exactly are the different elements? And so it’s been a couple of years since I did that video, and I wanted to get back and give you even more information, because it was also continued to evolve. And so I want to give you exactly what you’re asking for.

So, let’s start about what is the net operating income and how you get there. Just as a reminder, or if you’re watching this for the first time, it’s revenue minus your expenses will bring you to your net operating income as it relates to real estate.

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So once again, revenue minus expenses gets you to your net operating income. What I want to do today is really help you understand what are some of the different elements that take place in the revenue portion, and I also want to share with you just the evolution that we’ve gone through as we start to move more and more towards larger apartment buildings.

So some of the things that you’re going to want to take into consideration first of all, let’s talk about the REVENUE. There’re really two different aspects of revenue. So there’s the really positive side. So let’s think about the rent. So any rent that is collected from tenants is income. So think about your revenue as rent, number one. You can also think of other income that your apartment community may have. So for instance, things like services that you’re offering at the property. Things that come to mind, you could offer a laundry service. So any of the income that is collected from the laundry machines or the laundry service, however you operate it, is additional income to the property.

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You can also think about, and this especially as you get to the larger apartment communities, is something that is called the ratio utility building systems, or a lot of times you’ll hear it referred to as RUBS. And basically what that is it looks at your utility consumption based on either square footage or occupancy. It could be both, as well. And then based on that, you are able to bill back your tenant. So a lot of times, you may just be paying that and it’s not a way to have any type of income. But with RUBS, you can start to create income.

So those are really the ways that you bring money in on the revenue side of things, the rent side of things. I also want you to keep in mind, especially as you get to the larger apartment communities, some of the things that you’ll also need to take into consideration like vacancies. Whenever you have an apartment unit that is not there, that’s a negative income.

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So an income that’s not actually there. So you’ll want to account for that. And depending on how you underwrite your deals, meaning the way that you structure or formulate how you operate the property, you may use more aggressive or conservative numbers. I mean, I’m really conservative, so I like to use 10% vacancy any time that I am underwriting a property.

You also want to take into consideration things like the different concessions that you may have. Basically, a concession is just like recently I had an apartment, we wanted to do a special, and we’re offering $200 off for anyone that was moving in.

A concession is something that you do as an owner to bring in income, but it’s money that you’re leaving on the table. 

So it’s a negative income play, if you will. Also, any time you have bad debt. So any type of renters that are actually not paying, that’s income that is lost. So you’ll want to keep that in consideration, as well.

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And just the last thing is I want you to think about the different units. So a lot of times, you can use units, especially in your larger apartment communities, in different ways. For instance, you may have employees that are living on-site and you’re not charging them rent. So you’re actually using that, but it’s used for an employee, so that’s loss of revenue. You may also use that same unit because you want to show it off to new prospects, so you use it as a model or you may have a number of different models that you use that you don’t rent out. So that’s also lost rental income. And lastly, you may use it as a working space, so as an office space. So it’s a way for your employees to also be there and work. But any time you’re using the units in any of those different ways, it’s income that is not actually coming in. So it’s a negative income, if you will.

So that side, I just wanted to reiterate just some of the different things that you can think about with rent or rental income. And now, that’s the first part of the equation.

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Now, the second part of the equation is talking about expenses and so once again, remember, revenue minus what we’re getting ready to talk about now which are the EXPENSES.

And the first thing that comes to mind any time you’re operating a larger apartment community, or even if you’re having smaller apartment communities like I was in the beginning, you will have property management (Or not. Check this video : Self Managed or Property Management). So you want to think about the property management expense or the fees that you’re going to be paying. For smaller communities, it could be anywhere between 8 to 12%, and the larger communities, if you’re 150 or above, you may be anywhere between as low as 2% or could be up to 6%, something like that. So just to give you some ideas.

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You want to think about maintenance and repairs. So any time someone has to go out and repair something on your property, that goes into your maintenance and repairs.

Whenever you have employees, of course, you want to think about your payroll. So that’s an expense. A payroll expense that goes out. You also want to think about things like taxes. You have to pay taxes on the property that you own, so that is also an expense that you’re going to be paying on an annual basis. You may pay it quarterly, but on an annual basis, you want to think of that. Also think about insurance. Now, insurance is really important, and that is an expense that is going to be with you and is going to be part of the overall expense column that you have.

Also, we talked about the RUBS earlier. One of the ways to collect money back. But you also have utilities. So utility expenses, maybe electric for common areas. Depending on how large the community is, you may also have water in common areas, things like that. So keep into consideration all of the different utility expenses that could also happen.

And then lastly, I want to leave you with … And I guess this is really more for the larger communities, but also depending on if you have a number of different apartments spread out, you want to keep in mind that you have to always be advertising to make sure that you don’t have vacancies. So any time you’re advertising your property, those are also advertising expenses or advertising fees that you also want to take into consideration.

To summarize:

NOI= REVENUE – EXPENSES 

Revenue = Rent + Services + RUBS – Vacancies – Concessions – Working Space

Expenses = Property Management Expenses + Maintenance and Repairs + Payrolls + Taxes +
Insurance + Utilities + Marketing Expenses

I know that there are probably more expenses that we could talk about, but these are more of the major expenses. And what I’m starting to see as we get and look to buy bigger and bigger apartment complexes, and I thought it would be important to you because, once again, you ask a lot about giving you some more detail around what makes the NOI because you liked the video before of What is Net Operating Income or NOI, and I just wanted to share that with you.

As always, be sure to leave your answers under my video on my YouTube channel. Or get your conversation started in my private Facebook group.

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https://meetme.so/keeponcashflowsession

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