NOI basics- experts please help 8 posts by 7 users

Posted: 06/08/2008 at 07:13PM

ok im sure this has been discussed on here numerous times but I am looking at building a multi family portfolio in the NY/NJ area and Id like to know what Im looking for when I research the NOI and expense numbers on a property... is a 10% NOI on the price of a building a decent return after expenses? After taking the mortgage into consideration and only clearing maybe several hundred dollars a month for myself, does it take a reasonably large portfolio to build wealth in this game? Im young and would like to make a nice living now while setting myself up for a strong future... any suggestions/advice from the players would be appreciated

Posted: 06/16/2008 at 03:53PM

I think the OP needs to bring more specific information about the deal to get our advice. Technically, NOI should = (income - expenses), but not including the debt service. If your NOI, by that standard, is 10% of the purchase price, then it appears to be 10% cap rate which is potentially a very doable deal. But there are other factors that need to be considered and don't forget to do your due diligence to verify that income and expenses are accurate.

With a 10% cap rate its pretty easy to be significantly cash flow positive.

As nationwide said, a fairly good estimate of what expenses ought to be is 40-50% of the income. So basically if they are collecting X dollars in rent, etc, then cut that amount in half to get a rough estimate of the NOI.

If they report expenses lower than that amount then it might be possible to actually be lower, but verify why. The long term expenses are going to be closer to 50%. All sellers will try to present their numbers as favorably as possible. But you also need to know the area. Some geographical areas have higher expenses due to taxes, high maintenence costs, etc..so you need to know if your area tends to be under or over 50%. But for a rough estimate, use 50%.

Also, when doing your due diligence, make sure to have inspections to find out if there is any deferred maintenance, which is even more likely to be the case if they have historically had low expenses. That would mean that they have postponed taking care of certain expenses that should have been addressed. As you find out what those things are, you have to negotiate the sales price down because otherwise you will soon be faced with those expenses which are over and above what they have been reporting for the past couple years as their normal operating expenses.

Posted: 06/17/2008 at 03:29PM

Here's a primer on performing Financial Analysis of multi-unit properties, if you're interested:

[LINK REMOVED BY ADMIN - The point of the forums is to share information, not to plug your website. Please share your article here on the site so we can all read it.]

Posted: 06/27/2008 at 01:43PM

You could have the seller provide cash back (in escrow) specifically for the purpose of making these repairs. Or you could potentially get the lender to provide a " rehab loan" where the LTV is based on the ARV of the property, and roll the rehab costs into the loan.