Understanding Net Operating Income (NOI) and Why It Matters
Learn how to calculate NOI and why it's crucial for evaluating property performance.
Net Operating Income (NOI) is the total income a property generates minus all operating expenses, before accounting for debt service and capital expenditures.
Formula: NOI = Gross Operating Income - Operating Expenses
Where: - Gross Operating Income = Potential Rent + Other Income - Vacancy Loss - Operating Expenses = Property taxes, insurance, maintenance, management, utilities, HOA fees, etc.
NOI does NOT include: - Mortgage payments (debt service) - Capital expenditures (major improvements) - Income taxes - Depreciation
Example: - Annual Rent: $60,000 - Other Income: $2,400 - Vacancy Loss (5%): -$3,000 - Gross Operating Income: $59,400 - Operating Expenses: -$18,900 - NOI: $40,500
Why NOI matters: - Used to calculate cap rate - Measures property performance independent of financing - Helps compare properties objectively - Critical for property valuation - Lenders use it to assess loan applications
Tracking NOI over time helps identify trends in property performance and informs strategic decisions about rent increases, expense management, and potential property sale timing.