What is Net Operating Income in Real Estate Investing?

Net Operating Income is a metric used to estimate a property's profitability in real estate investing.

Net operating income, abbreviated NOI, is used to look at underlying cash flows in real estate investing before taxes, and financing charges or debt are included. By deducting gross operating expenditures from gross revenues, NOI calculates a property's income. When this metric is used in other industries like finance and accounting, it is referred to as “EBIT,” which stands for earnings before interest and taxes.

Gross revenues can refer to any way that a property produces income. Examples of this are rental income, parking fees, service modifications, vending machines, and washing machines.

All expenditures related to running the property are included in operational expenses. Operating expenses include the costs of running and maintaining a property. Examples include insurance, property taxes, and repair costs. 

Capital expenditures, such as costs for a new air-conditioning system for the entire building, are not included in the calculation.

Learn more about NOI

NOI is a statistic on a property's income and cash flow statement.

The method for calculating NOI is as follows: 

Net operating income = Gross operating income - Operating expenditures

NOI is also employed in the debt coverage ratio (DCR) for financed buildings, which notifies lenders and investors if a property's revenue covers its operational expenditures and debt obligations.

The net income multiplier, cash return on investment, and total return achieved through real estate investing are all calculated using NOI. 

Only raising rental or fee income, lowering vacancies, or cutting operational costs can affect NOI. The formula is typically unaffected by financing or income tax issues, making it a valuable metric for determining how well a property is handled.

Conclusion

Net operating income (NOI) is a regularly used metric for determining a property's profitability. The running expenditures on the property are subtracted from all revenue generated by the property in this formula.

This metric can be used in conjunction with others, like Cash-on-Cash Return, to indicate to the owner whether the revenue gained by owning and maintaining the property is worth the investment.

Though the term "net operating income" is most generally associated with real estate, it may be applied to any industry. It is usually referred to as "profits before interest and taxes" (EBIT).