Your Real Estate Net Operating Income Explained Plain and Simple

Your Real Estate Net Operating Income Explained Plain and Simple

Net operating income, in real estate, determines how to pay the debt service and compensation to the owners. If sellers do not allow us access to this information, we will not accept the listing. Because without it, we have nothing to sell!

The Importance of Net Operating Income

In our opinion, the number one factor is their net operating income (NOI). Why is this the #1 factor? Because banks and the SBA state it is the #1 factor.

Net operating income determines whether there are sufficient funds and compensation to pay the mortgage or debt service and payment to owners. If the debt service and compensation to the owner cannot be paid, there is nothing to sell or buy.

Increased Demand for Larger Single-Family Residences

In today’s market, smaller Inns may have more value as a single-family residence than as a Bed & Breakfast Inn. This is simply a supply & demand situation. The demand in today’s market is greater for larger single-family homes than for smaller bed & breakfast Inns. Remember, the property has a value as a bed & breakfast inn and or a single-family home, but not both.

Smaller Inns May Have More Value Being Sold as a Private Residence

Although it may cost them more to buy a 10 to 15 room inn, the net operating income (NOI) could be double or triple from a 5 to 6 bedroom (so they get a better return). Smaller inns (5-6 rooms) can have more value as a private residence than a business. They must be appraised as a private residence OR a bed and breakfast business, but NOT BOTH.

A Realistic Price Point Must Be Set

It is always great when the buyer and seller agree. However, just because there is an agreement on a price point, the appraiser may not agree on the value.

When this happens, the seller may be required to reduce the sales price, or the buyer may need to inject more funds, or it may require a concession from the buyer and seller. A realistic price point of the property must be set, adjusting the net operating income to show that there are sufficient funds to pay the debt service and the owners.

If The Real Estate Appraiser Does Not Agree

Buyers and sellers may agree, but if the appraiser does not agree, the seller must come down (or the buyer must produce the extra cash). Buyers have the pride of ownership, and sellers get satisfaction from earning a return for their investment & challenging work.

Benefits of Being Buyers and Sellers

Buyers get people from around the world who stay with them. Sellers owned the inn and enjoyed the guests, who may have become lifelong friends and acquaintances. Buyers get to live their dream of being inn owners & innkeepers, and sellers get to move on to their next phase of life.

The Current Real Estate Market

The real estate market is hot right now, so now is a suitable time to sell your property to meet the market demands. Buyers now is the time to buy, because of the limited supply. A limited inventory of bed and breakfast means it is important that both buyers and sellers act.

B&B Consulting

Licensed realtor and broker Rob Sales, of B&B Consulting, is an experienced professional. Having been the successful owner and innkeeper of several inns, along with his wife Jane. Contact Rob Sales today for a complimentary consultation. Whether you are looking to buy or sell a B&B inn, Rob’s specialty is hospitality properties.