A:

Net operating income (NOI) determines an entity's or property's revenue less all necessary operating expenses. NOI does not take into account interest, taxes, capital expenditures, depreciation and amortization expenses. Conversely, earnings before interest and taxes (EBIT) consists of  revenues less expenses, excluding tax and interest, but takes into account depreciation and amortization expenses. It determines a company's profitability.

EBIT is calculated by subtracting a company's cost of goods sold (COGS) and operating expenses from its revenue. EBIT can also be calculated as operating revenue and non-operating income less operating expenses.

For example, assume company ABC generated $50 million in revenue, and had COGS of $20 million, depreciation expenses of $3 million, non-operating income of $1 million and maintenance expenses of $10 million during the last fiscal year. Its resulting EBIT for last year was $21 million ($50 million + $1 million - $10 million - $20 million).

NOI is generally used to analyze the real estate market and a house's or building's ability to generate income. Real estate property can generate revenue from rent, parking fees, servicing and maintenance fees. A property may have operating expenses of insurance, property management fees, utility expenses, property taxes and janitorial fees. Income taxes do not impact a company's or real estate investment's NOI. However, property taxes are included in the operating expenses of a real estate investment's operating expenses.

For example, assume an investor purchases an apartment building in an all-cash deal. The property generates $20 million dollars in rents and servicing fees. The apartment building has operating expenses that amounts to $5 million and depreciation expenses of $100,000 for its laundry machines.

The resulting NOI generated by the apartment building is $15 million ($20 million - $5 million). But its EBIT is different. Remember, EBIT takes into account the depreciation expense, so the resulting EBIT generated by the apartment building is $14.9 million ($20 million - $5 million - $100,000).

NOI also determines a property's capitalization rate, or rate of return. A property's capitalization is calculated by dividing its annual NOI by the potential total sale price. Assume our building has a sale price of $120 million. Its capitalization rate is 12.5%.

RELATED FAQS
  1. What is the difference between EBIT and EBITDA?

    Take a deeper look at the actual differences between EBIT and EBITDA, and see how investors often confuse these terms with ... Read Answer >>
  2. What is the difference between operating income and EBITDA?

    Read about the major differences between earnings before interest, taxes, depreciation and amortization (EBITDA) and operating ... Read Answer >>
  3. How is EBIT breakeven affected by leverage and financing plans?

    Read about how financial leverage increases the break-even point for a corporation, which is the point at which earnings ... Read Answer >>
  4. How does degree of financial leverage (DFL) affect earnings per share (EPS)?

    Learn about degree of financial leverage, how to calculate a company's DFL and how the DFL affects earnings per share. Read Answer >>
Related Articles
  1. Investing

    7 Steps to A Hot Commercial Real Estate Deal

    For savvy real estate investors, times of lower prices reveal investment opportunity.
  2. Investing

    How Depreciation Works on a Rental Property

    One of the advantages of owning rental real estate is the depreciation tax deduction.
  3. Financial Advisor

    How Does Depreciation Reduce My Tax Bill?

    How the depreciation tax rule can assist real estate investors.
  4. Investing

    What You Should Know About Real Estate Valuation

    Accurate real estate valuation is important to mortgage lenders, investors, insurers, and buyers and sellers of real property.
  5. Investing

    Use Real Estate To Put Off Tax Bills

    Find out how you can build wealth and reduce your taxes.
  6. Investing

    The Advantages of Real Estate Versus Stocks

    Real estate investments shouldn't be overlooked as a way to diversify a portfolio and help mitigate risk.
  7. Investing

    Is It Worth Buying a Second Home to Rent?

    Mortgage interest rates are low, but consider these dos and don'ts before making the leap into rental property ownership.
  8. Investing

    3 Reasons to Invest in Multi-family Real Estate

    Here are three reasons to consider investing in multi-family real estate.
  9. Investing

    Including Rental Real Estate in Your Portfolio

    Why you should consider adding rental properties to your retirement investment portfolio.
RELATED TERMS
  1. Earnings Before Interest & Tax - EBIT

    Earnings Before Interest & Taxes (EBIT) is an indicator of a ...
  2. Income From Operations - IFO

    Income from operations is a company's earnings before interest, ...
  3. Operating Expense

    An operating expense is an expenditure that a business incurs ...
  4. Income Property

    An income property is property bought or developed to earn income ...
  5. Investment Property

    An investment property is a real estate property purchased with ...
  6. Degree of Financial Leverage - DFL

    Degree of Financial Leverage (DFL) is a ratio that measures the ...
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center