The revenue a property earns minus operating expensesOften referred to as “OpEx,” operating expenses refer to all costs necessary to operate and main..., vacancy, and uncollectible receivables.
The net operating income (NOI) encompasses all revenue from a property minus all necessary operating expenses. These operating expenses do not include capital expenditures and debt service payments.
As a calculation, the net operating income measures the profitability of income-generating real estate investments.
Net Operating Income in Real Estate Investment
Net operating income (NOI) is a foundational metric in real estate investing. By comparing a property’s income to its operating expenses, the NOI indicates to real estate investors if the income generated from renting their property outweighs the costs of ownership and upkeep.
When the NOI shows a substantial surplus over the expenses, it suggests that the property has the potential to be a lucrative investment. However, if the NOI falls significantly short of covering expenses, the property may not be financially viable.
Thus, the NOI is a valuable tool for property owners to make informed decisions about the profitability of owning and maintaining a real estate property for rental purposes, helping them assess whether the endeavor is worth the associated costs. Beyond its individual significance, the role of NOI in calculating the cap rateThe capitalization rate, or cap rate, is one of the most widely-used metrics for estimating the yiel... – a crucial measure of a property’s potential return on investment – further underscores its importance.
Net Operating Income Example
The net operating income formula is represented as follows:
Net operating income = RR (real estate revenue) − OE (operating expenses)
How to calculate net operating income
Let’s say an investor rented out a condo building with the following revenues and operating expenses:
Revenues:
- Rental income: $40,000
- Parking fees: $10,000
- Laundry machines: $5,000
Total Revenue = $55,000
Operating Expenses:
- Property taxes: $10,000
- Repair and maintenance: $5,000
- Property management fees: $3,000
- Insurance: $2,000
Total Operating Expenses = $20,000
The NOI in this case would be $55,000 – $20,000 = $35,000.
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