Savvy multifamily investors continually seek ways to enhance their returns on investments. To do this successfully, however, investors must understand real estate investing and the multifamily real estate market, including specific financial concepts like net operating income (NOI).
Net operating income (NOI) is essential for real estate investors. Understanding NOI and how to calculate it provides deeper insight into a property’s financial performance, helping investors make informed decisions. Here, we will discuss NOI calculation and strategies to increase a property’s NOI.
HOW DO YOU CALCULATE NOI IN REAL ESTATE?
Net operating income (NOI) is a valuation method used by real estate professionals to determine the profitability of an income-generating property. It’s calculated by subtracting a property’s operating expenses from its revenue and is usually included on the property’s cash flow and income statements. It does not include annual debt service. Simply put, NOI is a pre-tax measurement of income based on the sum of revenues minus operating expenses (revenue – operating expenses = NOI). The higher your NOI, the greater the potential property value and borrowing power for refinancing. [1]
It is important to note that NOI is just one method for quickly assessing income potential. Investors must still conduct due diligence to get a clearer picture of any investment property.
DOES NOI MEAN PROFIT?
NOI refers to the profitability of real estate investment properties. As a before-tax figure, it appears on a property’s income and cash flow statement. This includes principal and interest payments on loans, capital expenditures, amortization, and depreciation. [2]
For multifamily investors, NOI is crucial because it enables the comparison of potential investment opportunities. Investors use capitalization rate or cap rate as one of the primary ways to evaluate properties, and NOI is part of the cap rate calculation formula. [3]
WHAT IS AN IDEAL NOI IN REAL ESTATE?
Some investors ask, “What is an ideal NOI percentage?” However, NOI is not a percentage but a number calculated based on a real estate property’s income and expenses.
NOI may vary significantly from one real estate property to another, so there is no specific value we can use to determine the ideal NOI. However, the higher this number is, the better.
IS MORTGAGE INCLUDED IN NOI?
As a rule, NOI does not include numbers that can be written off against taxes and future earnings, like debt (e.g., mortgage). Major repairs and other one-time costs are also excluded from the calculation. These numbers are excluded simply because they do not serve the purpose of NOI. Additionally, the amount of debt can vary from one investor to another, making it irrelevant to the NOI calculation. For example, one investor may be able to put down 40%, while another can only put down 10%. If this number were included in the calculation, it would have a significant impact on the NOI.
Calculating a property’s NOI gives investors an idea of its true cash flow. It indicates whether a property is profitable and worth investing in, enabling them to make informed investment decisions. To measure a property’s cash flow and determine how much it needs to cover loans, you should calculate its debt service coverage ratio (DSCR). DSCR considers NOI. [1]
Finally, capital expenditures (CapEx) are excluded from the NOI calculation because they are a one-time expense that can vary widely from property to property and year to year. NOI calculates a reflection of ongoing costs and revenue. Therefore, you do not have to include CapEx in an NOI calculation. [1]
HOW DO YOU INCREASE YOUR NOI?
There are plenty of ways for real estate investors to increase the NOI of their investment property. The first and most obvious method is to increase the rent for each unit. You may try this upon unit turnover or lease renewal.
Resident retention balances the need for higher rent and occupancy. Market research shows that resident satisfaction, quality maintenance, community safety, and moderate rent increases can help minimize resident churn. [9] Amenities can significantly impact occupancy rates. Attractive amenities that enhance residents’ living experience may justify a slightly higher rent. [9]
In addition to increasing rent, you may also consider increasing the fees charged to residents, such as credit reporting fees, late fees, and pet fees.
Another potential source of income for landlords is utility income. Property owners sometimes take advantage of reimbursement perks, where certain expenses, such as property taxes, insurance, unexpected repairs, and utilities, are billed back to the residents as part of their rent or as a separate charge. [3]
Adjusting rent and changing your utilities are some of the most effective ways to increase your NOI. However, you can also generate additional income streams by introducing new services and upgrading existing amenities.
Continue reading here for operational and physical value-add strategies in multifamily real estate.
WHY SAVVY INVESTORS CHOOSE MULTIFAMILY INVESTING
Multifamily real estate encompasses residential properties with two to four units and commercial properties with five or more units. A smaller building with fewer units, like a duplex, would be categorized as residential. However, a more sizable operation, like an apartment community, would fall under commercial multifamily real estate. Apartment communities offer many benefits, which we will discuss below.
Thanks to the impressive number of units in an apartment building, investors can strive for a strong and stable cash flow. Rental income supports this endeavor, as you will likely be able to rely on residents providing monthly rent. [4]
Minimizing vacancies and delinquencies is key for property owners. A vacancy occurs in commercial multifamily apartments when a resident’s lease ends, they move out of their unit, and a new lease has not been executed, leaving the unit empty. Delinquency refers to the state a renter is in when past due on their rent.
With apartment buildings, even if one or two units become vacant now and then, you can still generate income because you earn rent from the occupied units. A multifamily investment property in a good location that offers high-quality amenities can typically expect vacancies to be filled promptly.
WORK WITH BAM CAPITAL FOR MULTIFAMILY PRIVATE PLACEMENT DEALS
Some investors hesitate to try actively investing in multifamily real estate simply because they know it can be challenging to manage. Not everyone is interested in becoming a sponsor. If you don’t have the experience, it could be tricky running something as big as an apartment building with hundreds of residents. You could hire a property management company to run it for you, but this still requires a significant amount of work.
With a multifamily private placement deal, you do not have to worry about any of this because it is a passive investment. In a private placement deal, a sponsor acts as the general partner and locates the real estate property. They put the deal together, handle the financing, and then look for investors who will participate and provide a portion of the capital needed to acquire the property.
A multifamily private placement deal occurs when multiple investors pool their capital to purchase a single property or a portfolio of properties. Owners can accomplish this with almost any type of real estate property, but when done with a multifamily property, it is referred to as multifamily private placement.
Multifamily real estate properties are usually challenging for lone investors to acquire. They are expensive and require a significant capital investment, even for wealthy individuals. However, multifamily private placement allows high-net-worth (HNW) individuals to participate in multifamily real estate investing without physical labor.
Private placement potentially solves two of real estate investors’ biggest concerns: the high entry barrier and property management. These deals are often exclusive for accredited investors—people with enough financial sophistication to assess the risks of certain unregistered securities. An accredited investor is an individual with an annual income of at least $200,000 (or $300,000 for joint income) or a net worth of at least $1 million (for both individual and joint net worth), excluding the value of their primary residence. Thanks to their high net worth and income, accredited investors tend to be more comfortable with a bit of illiquidity.
BAM Capital partners with accredited investors who want to enjoy passive income and all the other benefits of multifamily private placement. As the private equity arm of The BAM Companies, BAM Capital has been focusing on buying assets targeted as having strong profitability potential and staying disciplined in its investment thesis. BAM Capital’s investment strategy aims to create forced appreciation while helping to mitigate investor risk. To date, BAM Capital has successfully managed over $1.7 billion in assets across ~9,000 apartment units. [5]
Remember that no investment is without risk. Before making financial decisions, consult your investment advisor and schedule a call with a BAM Capital investment team member.
For additional multifamily real estate insights, visit Pathways to Passive Wealth, BAM Capital’s new platform designed to make real estate investing more accessible, transparent, and achievable for aspiring and experienced investors.
SOURCES:
[1]: Rocket Mortgage. (2024). “Net Operating Income (NOI): Definition And Formula.” https://www.rocketmortgage.com/learn/net-operating-income#
[2]: Investopedia. (2024). “Calculating Net Operating Income (NOI) for Real Estate.” https://www.investopedia.com/terms/n/noi.asp
[3]: Smartland. (2022). “10 Ways to Improve NOI at Multifamily Apartment Buildings.” https://smartland.com/resources/10-ways-to-improve-noi-at-multifamily-apartment-buildings/#:~:text=What%20is%20NOI%20in%20Commercial,what%20NOI%20concentrates%20exclusively%20on.
[4]: High Peaks Capital. (n.d.). “Why You Should Be Investing In Large Apartments.” https://highpeakscapital.com/why-you-should-be-investing-in-large-apartments/
[5]: BAM Capital. (n.d.). “Current Portfolio.” https://9dc18e923f.bamcapital.com/
[6]: Internal Revenue Service (IRS). (n.d.). “Rental income and expenses – Real estate tax tips.” https://www.irs.gov/businesses/small-businesses-self-employed/rental-income-and-expenses-real-estate-tax-tips#:~:text=Rental%20income%20is%20any%20payment,the%20year%20you%20pay%20them.
[7]: WallStreetPrep. (2024). “Effective Gross Income (EGI).” https://www.wallstreetprep.com/knowledge/effective-gross-income-egi/#:~:text=The%20Effective%20Gross%20Income%20(EGI,the%20primary%20source%20of%20returns.
[8]: Google Generative AI. (2025). “What is an EGI example in real estate?” https://www.google.com/search?q=what+is+an+EGI+example+in+real+estate
[9]: Google Generative AI. (2025). “Resident turnover balancing act between higher rent and occupancy.” https://www.google.com/search?q=resident+turnover+balancing+act+between+higher+rent+and+occupancy
