What is Net Operating Income (NOI)?
The net operating income (NOI) is what drives the value of a real estate investment property or portfolio as this shows investors the profitability and rate of return to expect from the portfolio.
Net Operating Income Formula
Net operating Income = (Gross Operating Income + Other Income) – Operating Expenses
What variables aren’t included in the net operating income calculation?
- Debt Service
- Income Taxes
- Tenant Improvements
- Capital Expenditures
- Property Depreciation
- Property Appreciation
Who should care about the net operating income? Investors
Investors should pay close attention to the net operating income of the real estate property or portfolio as this will allow them to see if the property is properly managed, cash flows, profitable, performing at market, and most importantly if it’s a robust investment.
The owner of the property or portfolio should pay close attention to the net operating income as they can compare their net operating income to other properties or portfolios in the market to ensure they aren’t underperforming the market. This metric will also show the owner if they are mismanaging the property.
Lenders pay close attention to this metric as it will be a key indicator of the level of risk the lender will be taking on by lending on the property or portfolio. If the net operating income is low, then a lender may choose to walk away from the deal. If the net operating income is high, then that will be a strong indicator that loan will carry a low level of risk.
Insurance companies pay close attention to the net operating income as it will show them the probability of the portfolio meetings its debt obligations and monthly payments. The net operating income is a great way for insurance companies to analyze the level of risk exposure they are dealing with.
What do you need to find net operating income?
- Annual rental income
- Annual other income (parking, laundry services, vending machines)
- Vacancy rate and credit losses
- Capital expenditures
- Operating expenses
What do lenders include in their operating expenses calculation?
- Annual property taxes
- Annual property management fees
- Maintenance, Repairs, and Utilities
- Annual insurance cost