Net Operating Income - NOI

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What is 'Net Operating Income - NOI'

Net operating income (NOI) is 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.

BREAKING DOWN '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.