Net Operating Income (NOI) Definition
Written by True Tamplin, BSc, CEPF®
Updated on January 11, 2021
Define NOI In Simple Terms
Net Operating Income, or NOI, is a valuation method used by real-estate owners to determine the value of their income generating properties.
NOI is calculated by taking the total revenue of a property and subtracting all reasonably necessary operating expenses.
It is a before-tax figure, showing up on the property’s income and cash flow statements, and it excludes payments on loans, capital expenditures, depreciation, and amortization.
NOI Formula
The formula for net operating income is as follows:
Where “RR”is real-state revenues, and “OE”is operating expenses.
Sources of revenue included in the NOI calculation may include rental income, parking structures, vending machines, and laundry facilities.
Operating expenses include the cost of maintaining and operating the building, including insurance, legal fees, and utilities.
NOI Example
NOI is used by real-estate investors to determine the capitalization rate of a property, which itself is a measure of the rate of return on a property investment.
For financed properties, NOI is also used to calculate the debt coverage ratio, or DCR, which tells lenders and investors whether or not a property is generating enough income to cover its debts and expense payments.