Net Operating Income - NOI

AAA

DEFINITION of 'Net Operating Income - NOI'

A calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus all reasonably necessary operating expenses. Aside from rent, a property might also generate revenue from parking and service fees, like vending and laundry machines. Operating expenses are those required to run and maintain the building and its grounds, such as insurance, property management fees, utilities, property taxes, repairs and janitorial fees. NOI is a before-tax figure; it also excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.

INVESTOPEDIA EXPLAINS 'Net Operating Income - NOI'

NOI appears on the property’s income and cash flow statements. If the total is negative, it is called a net operating loss (NOL). NOI is considered less vulnerable to manipulation than some other figures because it can only be increased by raising rents and associated fees or by decreasing reasonably necessary operating expenses. NOI is not the same as taxable income or cash flow. The difference between NOI and EBIT is non-operating income.

The “reasonably necessary” criterion for operating expenses means property owners might adjust some of their actual expenses up or down. If the owner provides one tenant with free rent, valued at $12,000 a year, in exchange for acting as property manager, but it would cost $24,000 to hire a professional manager on the open market, the owner can subtract the “reasonably necessary” cost of $24,000 from revenue rather than the actual cost of $12,000.

NOI helps owners and potential owners of retail buildings, office buildings and residential single- and multi-family properties to calculate several helpful ratios. NOI is used in determining the capitalization rate, which helps determine the property’s value and helps real estate investors compare different properties they might be considering buying or selling. For financed properties, NOI is also used in the 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 return on investment.

VIDEO

Loading the player...
RELATED TERMS
  1. Voodoo Accounting

    Creative rather than conservative accounting practices. Voodoo ...
  2. Net Of Tax

    An accounting figure that has been adjusted for the effects of ...
  3. Discontinued Operations

    A segment of a company's business that has been sold, disposed ...
  4. Pretax Operating Income - PTOI

    An accounting term that refers to the difference between a company's ...
  5. Net Income After Taxes - NIAT

    An accounting term, most often found in a company's annual report, ...
  6. Cook The Books

    A buzzword describing fraudulent activities performed by corporations ...
RELATED FAQS
  1. Is Net Operating Income (NOI) the same thing as Earnings Before Interest and Taxes ...

    Net operating income (NOI) determines a property's revenue less all necessary operating expenses. NOI does not take into ... Read Full Answer >>
  2. How do taxes impact Net Operating Income (NOI)?

    Net operating income (NOI) is a before-tax figure and does not take into account income taxes, loan payments, capital expenditures, ... Read Full Answer >>
  3. How is Net Operating Income (NOI) used in real estate?

    Net operating income (NOI) is used in the real estate market to determine the revenue that a property generates less operating ... Read Full Answer >>
  4. What is the difference between Operating Cash Flow and Net Operating Income (NOI)?

    Two metrics that investors look at in a company's financial statements are its net operating income and operating cash flow. ... Read Full Answer >>
  5. How do you use Excel to calculate a debt service coverage ratio (DSCR)?

    There are actually three different kinds of debt service coverage ratios, or DSCR, that can be calculated in Microsoft Excel. ... Read Full Answer >>
  6. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
Related Articles
  1. Investing

    Zooming In On Net Operating Income

    NOI is a long-run profitability measure that smart investors can count on.
  2. Personal Finance

    Top 8 Ways Companies Cook The Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.
  3. Home & Auto

    7 Steps To A Hot Commercial Real Estate Deal

    For savvy real estate investors, times of lower prices reveal investment opportunity.
  4. Options & Futures

    Advanced Financial Statement Analysis

    Learn what it means to do your homework on a company's performance and reporting practices before investing.
  5. Markets

    Introduction To Fundamental Analysis

    Learn this easy-to-understand technique of analyzing a company's financial statements and reports.
  6. Economics

    Understanding the Top Line

    Top line refers to a company’s gross sales without any reductions for discounts or returns.
  7. Economics

    What's an Allowance for Doubtful Accounts?

    The allowance for doubtful accounts represents the percentage of the accounts receivable the company expects to write-off as uncollectible.
  8. Fundamental Analysis

    Understanding Activity Ratios

    Activity ratios measure how effectively a business uses its assets.
  9. Investing Basics

    What is Accrued Income?

    In a mutual fund, accrued income is earnings that have accumulated over the year, but have not yet been paid out to shareholders.
  10. Fundamental Analysis

    Do Stock Splits Cause Volatility?

    Since stock splits decrease the stock price, do they also increase volatility because shares are traded in smaller increments? Investopedia examines assumptions about this increasingly common ...

You May Also Like

Hot Definitions
  1. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  2. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  3. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  4. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  5. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  6. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!