Net Operating Income

Net Operating Income (NOI): Definition, Calculation,
Components, and Example

By
WILL KENTON
Updated July 06, 2021
Reviewed by MARGARET JAMES

Fact checked by KATRINA MUNICHIELLO
Investopedia / Jessica Olah
What Is Net Operating Income (NOI)?

Net operating income (NOI) is a calculation used to analyze the profitability of income-
generating real estate investments. NOI equals all revenue from the property, minus all
reasonably necessary operating expenses.
NOI is a before-tax figure, appearing on a property’s income and cash flow statement, that
excludes principal and interest payments on loans, capital expenditures, depreciation,
and amortization. When this metric is used in other industries, it is referred to as “EBIT,”
which stands for “earnings before interest and taxes.”
KEY TAKEAWAYS
 Net operating income measures an income-producing property's profitability before
adding in any costs from financing or taxes.
 To calculate NOI, subtract all operating expenses incurred on a property from all
revenue generated on the property.
 The operating expenses used in the NOI metric can be manipulated if a property
owner defers or accelerates certain income or expense items.
 The NOI metric does not include capital expenditures.
 NOI will indicate to a property owner if renting a property is worth the expense of
owning and maintaining it.

Net Operating Income
Understanding Net Operating Income (NOI)

Net operating income is a valuation method used by real estate professionals to determine
the precise value of their income-producing properties. To calculate NOI, the property's
operating expenses must be subtracted from the income a property produces.
In addition to rental income, a property might also generate revenue from amenities such
as parking structures, vending machines, and laundry facilities. Operating expenses include
the costs of running and maintaining the building, including insurance premiums, legal fees,
utilities, property taxes, repair costs, and janitorial fees. Capital expenditures, such as costs
for a new air-conditioning system for the entire building, are not included in the
calculation.
NOI helps real estate investors determine the capitalization rate, which in turn helps them
calculate a property’s value, thus allowing them to compare different properties they may
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.
How to Calculate Net Operating Income (NOI)

To calculate net operating income, subtract operating expenses from the revenue
generated by a property. Revenue from real estate includes rental income, parking fees,
service changes, vending machines, laundry machines, and so on.
Operating expenses include all of the costs associated with operating the property. These
include property management fees, insurance, utilities, property taxes, repairs, and
maintenance.
NOI Formula
Net operating income=��−��where:��=real estate revenue��=operating expenses
Net operating income=RR−OEwhere:RR=real estate revenueOE=operating expenses
As an example, let's assume the below information was the profile of a particular condo
building that an owner was renting out.
Revenue:
 Rental income: $20,000
 Parking fees: $5,000
 Laundry machines: $1,000
Total Revenues = $26,000

Now, let's assume the operating expenses of the condo building are as follows:
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) in this example would be $26,000 - $10,000 = $16,000.
Components of NOI
Based on the formula above, the primary components of NOI are total revenues and total
operating expenses. The total revenue includes all of the income from a real estate
property, not just the rent. In some buildings, that may include the additional income from
renting out parking or storage spaces, or the revenue from on-site vending machines or
laundry services.
The operating expenses represent the total costs associated with the rental property. In
addition to maintenance and repairs, it also includes the costs of taxes and insurance,
property management fees, and any utilities that are not covered by the tenants.
Net Operating Income vs. Gross Operating Income

NOI is different from the gross operating income. In real estate, this represents the total
potential income from a property, minus any lost income due to vacancies. The net
operating income is the gross operating income, minus operating expenses.
Net operating income is useful in estimating the potential income from an investment
property. However, it does not account for some potential costs, such as income taxes or
mortgage amortization.
NOI and Cap Rate

Net operating income is used to calculate the capitalization rate, a measure of the
profitability of an investment property in relation to the total cost. The cap rate is
calculated by dividing the NOI by the total cost of a property.
Expressed as a percentage, the capitalization rate represents the investment returns from
different properties. Investors use cap rates to compare the returns of different properties.
Example of NOI
Let us assume that you own a property that annually pulls in $120,000 in revenues and
incurs $80,000 in operating expenses. In this circumstance, it will have a resulting NOI of
$40,000 ($120,000 - $80,000). If the total is negative, where operating expenses are higher
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 the property to be mortgaged, even more than they factor an investor's credit
history into their decisions. Simply put: this metric helps lenders fundamentally assess the
initial value of the property by forecasting its cash flows.
NOI is used to determine the capitalization rate of a property, also known as the return on
investment (ROI) in real estate. It divides NOI by the purchase price.
If a property is deemed profitable, the lenders also use this figure to determine the size of
the loan they’re willing to make. On the other hand, if the property shows a net operating
loss, lenders are likely to reject the borrower's mortgage application, outright.
Property owners can manipulate their operating expenses by deferring certain expenses
while accelerating others. NOI can also be increased by raising rents and other fees, while
simultaneously decreasing reasonably necessary operating expenses.
As an example of the latter, consider a scenario where an apartment owner waives a

tenant’s yearly $12,000 rent, in exchange for that renter acting as a property manager. If
the apartment owner would normally pay a building manager a $30,000 salary, they may
consequently subtract the “reasonably necessary” cost of $30,000 from revenue, rather
than the actual cost of $12,000.
What Is the Formula for Calculating NOI?

The formula for calculating NOI is as follows:
NOI = real estate revenue - operating expenses
What Is the Difference Between Net Income and Net Operating

Income?
Net operating income is revenue less all operating expenses while net income is revenue
less all expenses, including operating expenses and non-operating expenses, such as taxes.
What Is a Good Net Operating Income Percentage?

NOI is not a percentage but rather a number that takes into consideration the revenues
and expenses of a property. It can be compared to the entire value of the property if that
property had been paid fully in cash. In this case, the higher the net operating income to
property price percentage, the better.
The Bottom Line

Net operating income (NOI) is a commonly used figure to assess the profitability of a
property. 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
expenses, the more profitable a property is. This tells the owner if the income generated
from owning and maintaining the property is worth the cost.

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Net Operating Income (NOI): Definition, Calculation,

Components, and Example

Reviewed by MARGARET JAMES

What Is Net Operating Income (NOI)?

Understanding Net Operating Income (NOI)

How to Calculate Net Operating Income (NOI)

Total Revenues = $26,000

Total Operating Expenses = $10,000

Net Operating Income vs. Gross Operating Income

NOI and Cap Rate

As an example of the latter, consider a scenario where an apartment owner waives a

What Is the Formula for Calculating NOI?

NOI = real estate revenue - operating expenses

What Is the Difference Between Net Income and Net Operating

What Is a Good Net Operating Income Percentage?

The Bottom Line

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