When you trade-up to a NNN property (or properties), you can defer all capital gains taxes with a §1031 exchange and earn a stable monthly income while you continue to work or enjoy life in retirement. If you already own rental properties that require hands-on management and significant operating expenses, it may be time to let go of the headache of high-maintenance investments and earn a comparable income without the hassle.
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The tenant agrees to a long-term lease (10 to 20 years) that requires paying the “net” amount for three types of costs – net real estate taxes on the leased asset, net building insurance, and net common area maintenance. This is one reason Westwood Net Lease Advisors highly recommends NNN investments. The very nature of absolute NNN lease properties excludes any landlord responsibilities or expenses. If you are just beginning your property search, the simple calculation of NOI and cap rate gives you a measurement to assess properties and a solid idea of which ones best fit your objectives. There are other balance-sheet details and financial decisions that can be explained by your buyer’s advisor and financial team once you narrow your search to a few select properties. NOI is also used to calculate the net-income multiplier, cash-on-cash (CoC) return, and total return on investment (IRR). (Cap rate is not the same as the cash-on-cash return, which is pre-tax cash flow divided by the total amount of cash invested).įor financed properties, lenders use NOI to ensure a property’s income covers its operating expenses and debt payments (the debt coverage ratio – DCR) and to forecast cash flow. A lower cap rate usually equates to less ROI, as well as potentially lower risk. A higher cap rate typically equates to a larger ROI but may also indicate a bit more risk.
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When pricing a NNN property, the appropriate cap rate is applied to the NOI. These items do not impact the potential to make income, so they’re not included in NOI.ĭetermining a true NOI is essential when evaluating commercial property.
NOI CALCULATION DEPRECIATION HOW TO
However, what if you decide to invest in an absolute triple-net (NNN) lease property where there aren’t any operating expenses? NOI becomes pretty straightforward! Here is a synopsis of how to calculate NOI for general commercial properties, what figures to use for these types of properties, and how NOI plays a role in the capitalization rate (cap rate) and financing.
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Put simply, to calculate NOI, subtract the day-to-day operating expenses from the income a property produces. When commercial real estate (CRE) investing, it is imperative to understand and calculate net operating income (NOI) to help determine the profitability of an investment property.