What is Net Operating Income (N.O.I.)?

Net Operating Income (NOI) is a metric used to measure the profitability of real estate investments. It is calculated by subtracting operating expenses from the gross operating income of a property. Net operating income is a very important calculation used to determine an investors return on investment (ROI).

When assessing a potential real estate investment, NOI gives investors an estimation of the amount of income they can expect to realize from the property. In some cases, such as with a single family housing investment, NOI can be as simple as subtracting maintenance costs and insurance from the monthly rental income. However, with commercial investments NOI can become more complicated and include many other aspects such as loan payments, reserves, leased tenant improvements, and more.

Net operating income is used by investors to compare multiple investments and can be used to determine a forecasted return on investment. A higher NOI indicates that the investment is more profitable and offers a higher rate of return. Investors should be careful to not confuse net operating income with the total return on the investment.

Net operating income is also important to lenders and financial institutions when assessing the value of a property and deciding whether or not to approve a loan on a property. Lenders review NOI for a few different reasons, these include; verifying a borrower’s income and ability to pay, evaluating the risk of a loan, assessing the performance of an existing loan, and deciding the interest rate on a loan.

Another key use of NOI is valuation. The NOI of the property can be compared to the current market rate of similar investments to determine the current market value of the property. This method of valuation is often used by investors who are looking to purchase existing investments, as it gives them a rough estimate of the property’s value and can help them decide if the price is a good deal.

To calculate net operating income, first start by gathering the relevant information. This typically includes the total annual income of the property and the total expenses incurred in the same period. Expenses should include such items as taxes, overhead and operating costs, insurance, utilities, repairs, and other related costs. The calculation will vary slightly depending upon if you’re dealing with a residential or commercial property as they have different types and levels of expenses.

Once you have collected the information, you can begin to calculate NOI.

Start by taking the total annual income for the property and subtracting any unpaid or prepaid expenses. Unpaid expenses are those that have been accrued but not yet paid out, such as a quarter’s worth of advanced insurance premiums. Subtracting unpaid or prepaid expenses first will give you the total income for the period.

Next, subtract the total expenses from the total income. This will give you the total operating income for that time period. To calculate NOI, also subtract any capital recorded during that period. This could include a one-time payment like a lease termination fee, or capital improvements like a remodel. The result of this calculation is the net operating income of the property.

NOI is an important metric for analyzing the performance of an investment property. It is calculated by taking the total income and subtracting any prepaid or unpaid expenses, as well as capital expenses. Knowing how to correctly calculate NOI can be of great use to property owners and investors alike, as it provides insight into the profitability of the property.

Overall, net operating income is an important metric for many parties when assessing the profitability and value of a property. It is a key calculation and should be considered when evaluating a potential purchase of real estate.

To see how Team Sobiko’s Realtors® may assist you, please visit our underwriting, commercial or residential service pages.

This publication was created with the help of artificial intelligence software, which was then reviewed and edited for accuracy by a Team Sobiko staff member.