What Is Net Operating Income (NOI)?

Net operating income (NOI) shows the profitability of income-generating real estate investments. NOI includes all revenue from the property, minus necessary 澳洲幸运5官方开奖结果体彩网:operating expenses. However, NOI is a before-income-tax figure on a property’s income and cash flow statement, excluding principal and interest payments on loans, capital expenditures, depreciation, and 澳洲幸运5官方开奖结果体彩网:amortization.

What NOI Tells Real Estate Investors

NOI looks at the total revenue vs. the total operating expenses of a rental property. Revenue is income from rent, parking or storage fees, and on-site vending machines or laundry services. Operating expenses include maintenance and repairs, 澳洲幸运5官方开奖结果体彩网:property taxes and insurance, property management fees, janitorial services, and utilities. 澳洲幸运5官方开奖结果体彩网:Capital expenditures, such as costs for a new air conditioning sy💃stem for the entire buiꦺlding, are not included in NOI.

NOI is used to calculate the 澳洲幸运5官方开奖结果体彩网:capitalization rate, a measure of an investment property's profitabilit🐻y relative to its total cost. The cap rate is calculated by dividing the NOI by the property's total cost. Expressed as a percentage, the capitalization rate helps investors compare the returns of different properties.

For financed properties, NOI is also used in the 澳洲幸运5官方开奖结果体彩网:debt coverage ratio (DCR), which tells lenders and investors whether a property’s income covers its operating expenses and debt payments. NOI is also used to calculate the net income multiplier, cash return on investment, and total r🌟eturn on investment.

Formula and Example

$\begin{aligned} &\text{Net operating income} = RR - OE \\ &\textbf{where:}\\ &RR=\text{real estate revenue}\\ &OE=\text{operating expenses}\\ \end{aligned}$​Net operating income=RR−OEwhere:RR=real estate revenueOE=operating expenses​

The following information is an example of a rental co🏅ndominium:ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ

澳洲幸运5官方开奖结果体彩网: Revenue:

• Rental income: $20,000
• Parking fees: $5,000
• Laundry machines: $1,000

Total Revenues = $26,000

澳洲幸运5官方开奖结果体彩网: Operating Expenses:

• Property management fees: $1,000
• Property taxes: $5,000
• Repair and maintenance: $3,000
• Insurance: $1,000

Total Operating Expenses = $10,000

The net operating income (NOI) is $26,000 - $10,000 = $16,000.

Profit and Loss

An owner who collects $120,000 in revenues and incurs $80,000 in operating expenses will have a resulting NOI of $40,000 ($120,000 - $80,000). If the total is negative, with higher costs than revenues, the result is called a net operating loss (NOL).

Creditors and commercial lenders rely heavily on NOI to determine the income generation potential of a mortgaged property. NOI helps lenders forecast a property’s cash flows. If a property is profitable, the lenders also use this figure to determine the amount they are willing to lend. Lenders may reject a 澳洲幸运5官方开奖结果体彩网:mortgage application if a property shows a net operating loss.

Property owners can manipulate operating expenses by deferring certain expenses while accelerating others. NOI can also be increased by raising rents and other fees while decreasing operating costs. If an apartment owner waives a tenant’s yearly $12,000 rent in exchange for that renter acting as a property manager, valued as a $30,000 cost, the owner may subtract the cost from 𓂃the revenue.

The Bottom Line

Net operating income (NOI) can assess a property's profitability. The calculation involves subtracting all operating expenses on the property from all the revenue generated from the property. The higher the revenues and the smaller the costs, the more profitable a property is.