Net Operating Income

Intermediate

Net operating income (NOI) is the income a property generates after deducting operating expenses but before deducting mortgage payments, income taxes, depreciation and capital spending.

NOI shows how much a property earns from its operations, independent of how it is financed. It is a key figure in valuing income-producing property.

To calculate NOI, start with the property’s potential rental income, adjust for vacancies and unpaid rent, add other income, such as parking fees, and subtract operating expenses, such as property management, insurance, maintenance, utilities paid by the owner and property taxes.

For example, a building collects rent of 100,000 after vacancies and earns 5,000 from parking. Bad debts are 5,000 and operating expenses are 35,000. Its NOI is 100,000 plus 5,000 minus 5,000 minus 35,000, or 65,000.

NOI is used to calculate the capitalization rate, the debt service coverage ratio and the debt yield. Lenders use it to judge how much they can safely lend. Because NOI excludes mortgage costs, it allows investors to compare properties regardless of how much debt each owner uses. Owners can increase NOI by raising rents, reducing vacancies or cutting costs.

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