Net Operating Income

Net Operating Income (NOI) is a key metric in real estate that represents the total income a property generates after operating expenses, but before deducting taxes, capital expenditures, debt service, and depreciation.

NOI is calculated by subtracting all operating expenses from the property's total potential income. The total potential income includes not only rental income but also other income streams such as parking fees, laundry income, or income from vending machines. Operating expenses include costs like property management fees, utilities, insurance, property taxes, maintenance, and repairs. Importantly, NOI does not account for non-operating expenses like mortgage payments, capital improvements, or depreciation.

Here is the formula for NOI:

Net Operating Income = Potential Rental Income + Other Income - Operating Expenses

NOI is a crucial measure for investors because it provides an indication of the profitability and financial performance of an income-generating property. Higher NOI indicates a more profitable property.

Investors use NOI to calculate other important metrics like capitalization rate (or cap rate), which is used to estimate the potential return on an investment, and Debt Service Coverage Ratio (DSCR), which is used to assess the property's ability to cover its debt obligations.

It's important to note that NOI is a pre-tax figure and does not take into account an investor's specific tax situation or capital structure. It's also a gross figure, in that it doesn't account for capital expenditures needed to maintain the property over the long term.