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Net operating income is the total income generated from real estate before taxes and other operating expenses are subtracted. The most common way of generation is annual. Net operating income is calculated by subtracting all allowable operating expenses, such as mortgage payments, maintenance costs, utilities and insurance premiums from gross income.

What is Net Operating Income?

A calculation known as net operating income (NOI) is used to estimate the profitability of income-producing real estate investments. NOI is the sum of all property income less any operating expenses deemed necessary. This is a measure of the potential return on an investment or even a portfolio of investments, as well as an important factor for lenders in evaluating loan requests.

NOI is a pre-tax income figure and does not include any personal expenses such as loan repayments, capital improvements, taxes or insurance premiums. It also does not take into account any depreciation or appreciation that may occur over time.

Key moments

Before deducting any financing costs or taxes, net operating income measures the profitability of an income-producing asset.

Subtract all operating expenses associated with the property from all revenue earned from the property to find the NOI.

A property owner can manipulate the operating expenses used in the NOI metric by delaying or accelerating specific revenue or expense items.

Capital expenditure is excluded from the NOI.

A property owner can use NOI to determine whether the costs of owning and maintaining a property outweigh the benefits of renting it out.

What do we mean by  “net operating income”?

Real estate experts use net operating income as a valuation method to establish the exact value of their income producing properties. A property’s operating expenses must be deducted from the revenue it generates to determine NOI.

A property can generate income from amenities such as parking lots, vending machines and laundromats in addition to rental income. Costs associated with the operation and maintenance of the building, such as insurance premiums, legal fees, utilities, property taxes, repair costs and janitorial services, are called operating expenses. The calculation does not include capital costs, such as the cost of a brand new air conditioning system for the entire structure.

Real estate investors can compare different properties they may be considering buying or selling using NOI to help them calculate capitalization rates, which in turn helps them determine the value of the property.

The Debt Coverage Ratio (DCR), which informs lenders and investors whether a property’s income covers operating expenses and debt payments, also uses NOI for financed properties. The net income multiplier, cash return on investment and total return on investment are calculated using NOI.

Methods of determining net operating income

Subtract operating expenses from property income to determine net operating income. Rental income, parking fees, changes in services, vending machine and laundry revenue, among other sources of income, are included in real estate.

All expenses incurred to maintain the property are called operating expenses. These consist of property management costs as well as maintenance, repairs and utilities.

Parts of net operating income

According to the formula above, total revenues and total operating expenses make up the majority of NOI. Total income includes all sources of income, not just rent, from real property. In some structures, this may include additional revenue from rentals of parking or storage space, as well as profits from on-site vending machines or laundry facilities.

The total costs associated with the rental property are represented by operating expenses. It also covers any utilities not paid by the tenants, as well as the cost of taxes, insurance and property management fees.

Comparison of gross operating income and net operating income

Gross operating income and NOI are two different concepts. This is the total potential income from real estate, minus any lost income as a result of vacancies. The difference between gross operating income and operating expenses is net operating income.

When calculating the potential income from an investment property, net operating income is useful. However, it does not take into account some potential costs such as income taxes or mortgage amortization.