Net Operating Income (NOI)
Net Operating Income (NOI) is a key financial metric used primarily in real estate investment analysis to assess the profitability of an income-generating property. It represents the total revenue generated from the property minus the operating expenses incurred to maintain that property, excluding financing costs and taxes.
To calculate NOI, the formula is:
NOI = Gross Rental Income – Operating Expenses
Gross Rental Income includes all income from the property, such as rent payments, parking fees, and other ancillary income streams. Operating Expenses encompass costs necessary for the property’s operation, including property management fees, maintenance, insurance, property taxes, and utilities, but do not include mortgage payments or income taxes.
For example, if a commercial property has a Gross Rental Income of $200,000 and its Operating Expenses total $80,000, the Net Operating Income would be:
NOI = $200,000 – $80,000 = $120,000
This figure is crucial for investors as it provides a clear picture of the property’s operational performance and is often used to determine the value of the property through various valuation methods, such as the income approach. A higher NOI indicates a more profitable property, making it an important metric for real estate investors and financiers.
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