Net operating income is necessary to determine cap rate. It establishes market value and gives a valuation for the purchase price. Once a properties proforma is built, using current income and expenses, it is time to build a five to ten-year plan. Forecasting NOI is necessary to gauge future operations and value potential as well as to secure acquisition funding.
Net Operating income (NOI) is calculated by annual effective income less annual operational expenses. Using a properties offering memorandum (OM) that reflects an original NOI of $1,272,713. The current NOI could be improved. Use an expense standard of 50% against the current effective income of $4,372,950. This reveals a NOI of$ 2,186,475. This clearly indicates that there is plenty of opportunities to improve the NOI.
To achieve an increase in NOI and property value implement the following: increase income, decrease expenses, and stabilize resident base and management team. With a conservative proforma by the end of the fifth year the NOI can easily reflect $2,297,168 and successfully be achieved. This is approximately $100,000 more than a pre-planned estimate.