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Net Operating Income (NOI)

Real Estate Definitions for Real Estate Investing

Net Operating Income (NOI)

Net operating income (NOI) is a calculation that is used to asses how much income a property will generate.  The net operating income is also used to value a property by applying a capitalization rate or cap rate.  NOI is also used in the Debt Coverage Ratio (DCR) which tells lenders and investors whether a property’s income covers its operating expenses and debt payments.

Net operating income (NOI) is the property’s gross potential rental income plus any other income, such as late fees or parking income.  This amount is reduced by vacancies, credits and rental expenses.  Rental expenses are generally those that are required to run and maintain the property such as insurance, repairs and maintenance, utilities and property taxes.

Net operating income is not the same things as a property’s cash flow or the property’s taxable income.

Net operating income does not include debt payments or incomes taxes (depreciation, amortization and income taxes).  Essentially, Net Operating Income (NOI) is the net cash generated before mortgage payments and income taxes.

The reason debt payments and income taxes are not used in the calculation is because it can range wildly between investors.  As example, you may have one individual who uses all cash to buy a property while another uses all debt.  Thus, if debt payments were used in the Net Operating Income (NOI) calculation, the value of the property would dramatically be different among investors just based on the level of debt used which would make no sense.

Our real estate investment software calculates Net Operating Income (NOI) so that you are in a better position of understating how much to offer for a particular property and make the appropriate presentations to bankers, lenders and prospective real estate partners.