If you are evaluating an income property, one number sits at the center of the conversation: net operating income, or NOI. The offering materials for 309 & 311 Grace Ave list a current baseline NOI of $33,376. Today we will explain what that number means and how to test it.
What NOI measures
NOI is the income a property produces after operating expenses, but before debt payments, income taxes, and depreciation. The formula is straightforward:
NOI = Gross income - Vacancy and credit loss - Operating expenses
Operating expenses usually include property taxes, insurance, repairs and maintenance, utilities paid by the owner, landscaping, management fees, and reserves. Mortgage payments are not included, because NOI is meant to describe the property itself, independent of how it is financed.
NOI matters because it drives value. Investors commonly estimate a property's value by dividing NOI by a capitalization rate. A higher NOI generally supports a higher value, which is why we will spend several posts on how NOI can grow.
Reading the $33,376 figure
The current monthly rent is listed at $2,781 across both units. Annualized, that is about $33,372, which is almost identical to the baseline NOI. That tells us something important: the baseline figure appears to closely track gross annualized rent. A true NOI would normally be lower than gross rent, because owning a property always carries costs.
We raise this not to cast doubt on the property, but because it is exactly the kind of detail a serious buyer should catch. Our advice is to treat $33,376 as a starting reference point and verify it independently.
What to request before you underwrite
Ask for the following documents and then build your own numbers:
- Current rent roll and leases, if any apply, or confirmation that units are vacant
- Trailing 12 months of income and expenses
- Property tax bill, and an estimate of reassessment after purchase
- Insurance quote for your intended coverage
- Utility bills and a clear list of who pays what
- Maintenance and repair history
- Any management agreements or service contracts
Property taxes deserve special attention. In California, a purchase can trigger a reassessment based on the new price, so the seller's tax bill may be lower than yours will be.
Build a conservative estimate
Here is a simple approach. Start with the realistic rent for each unit. Subtract a vacancy allowance, such as one month per year per unit, or whatever fits your market research. Then subtract each operating expense using real quotes and bills. Add a reserve for repairs and capital items. The result is your own NOI estimate, and it is the one you should use to make decisions.
A cautious NOI is often lower than the headline number, and that is fine. Deals that still work on conservative assumptions are usually the strongest.
A quick example of the method
Imagine a property with $36,000 in annual gross rent, a $1,800 vacancy allowance, and $14,000 in operating expenses and reserves. The NOI would be $20,200. That example is purely illustrative and does not describe Grace Ave, but it shows how quickly expenses reshape the picture. Run the same exercise with real numbers for the property you are considering.
Why this builds credibility
Establishing the baseline honestly matters because the upside story comes next. The pro forma target of $57,600 only makes sense if the starting point is understood. We will walk through that upside, and the expenses that come with it, in the value-add section of this series.
Get the documents
Start with the current income statement and use it as the foundation for your own spreadsheet. If you have questions on any line item, our team is happy to help clarify.
Next step: Download Current Income Statement.
This article is educational and is not financial, tax, or investment advice. Figures are taken from the offering materials and should be independently verified.