Those who have been working in real estate for only a limited period, are already familiar with the term Net Operating Income (NOI). While people may be familiar with the term, do they know what it means? More importantly, do they know how to improve it?
Whether people are new to the industry of commercial real estate, transitioning into a new role, or just looking to refresh their knowledge, they are in luck. It is time we all take a good look at the term Net Operating Income, why it matters, and what are the ways firms can start improving it.
Net operating income (NOI) – what is it?
Let’s define it using simple concepts. Net operating income (NOI) is a benchmark used in measuring the profitability of a building or portfolio. It is meant to help professionals see the situation at ground zero level and provide the team a quick snapshot on whether or not a building is worth continuing to own and maintain.
Net operating income is just one metric used by investors, portfolio managers, and asset managers in determining how valuable property is and when it should buy or sell the property. For example, NOI is used to determine the CAP rate which provides the benchmark for the amount of risk present in a certain asset.
How can a facility management team of any firm calculate the Net Operating Income (NOI) of their buildings?
Determining the NOI of the buildings for any company and its administration/facility management team is not that difficult. Experts working at a top-notch Facility Management Company in Saudi Arabia based in Riyadh recommend professionals compile two numbers before they start:
Revenue generated from existing buildings
How much money do the building and property give to the company in the form of Parking fees, rent, and other income sources? For other industries, professionals need to ensure that they remove services fees or other sources not directly related to the building and property.
Operating expenses from buildings
How much does it cost to maintain the building (including the expenses of property taxes and insurance)? This statistic gets at the building’s quality and how well it is being maintained. It should also be observed that capital investments are not included in this statistic.
There is no set standard for NOI to be good (similar to parents having no favorite child) Because this number provides a baseline to compare the building or portfolio to other similar ones present in the area.
Statistics alone do not tell the good from the bad. Employees performing a bit of comparison research can help get a clearer picture of the value of their building. Factors like industry, location, and age of the building can affect the actual figure of the NOI. All of these factors should be considered for comparisons.
Tips on improving the Net Operating Income (NOI)
Suppose an executive is in charge of managing a building or portfolio thoroughly and figures of the NOI are not exactly what they were expected to be. Improving the NOI begins with taking a good observation at how the buildings are being operated and maintained these days.
Good quality buildings not only have less maintenance (especially emergency maintenance because that can be costly) but also with a higher quality building, facility management firms can charge more per square foot.
To get a good grasp of how things are going today, it would be wise for executives to contact their facilities’ teams and building operators. If a facility management software is being used, employees should be able to get baseline data around the maintenance work carried out daily.
One thing to consider for building maintenance is calculating how much preventive maintenance is happening. It may require a small amount of upfront investment, it allows teams to stay ahead of breakdowns and extend the useful life of facility assets, saving money in the long run.
Deferred maintenance is another area having small initial investments which can improve quality of the buildings and their NOI by quite vast margins. Chances are that no team has been able to get active in fixing a long list of deferred maintenance activities due to budget restraints.
These tasks often aren’t costly individually but as that list becomes longer, it hence leads to more repairs and more breakdowns, adding more to the maintenance bill and expenses.
The last area to check for improving building quality is the amount and kind of capital investments needed in the buildings.