What is NOI and how is it calculated?

What is NOI?

NOI, or Net Operating Income, in real estate is the most important financial metric used to evaluate the profitability of income-producing properties. It represents the total income generated by a property after subtracting all the necessary operating expenses, excluding mortgage payments and capital expenditures. This figure quantifies the property's ability to generate profit from its core operations.

How is NOI Calculated?

Net Operating Income (NOI) in real estate is calculated by subtracting all necessary operating expenses from the total income generated by the property. Here's the process:

1. Total Income: Sum up all the income from the property. This includes rental income and any other income like parking fees, service charges, or laundry facilities.
2. Operating Expenses: Aggregate all the necessary expenses for running and maintaining the property. These include property management fees, maintenance costs, property taxes, insurance, and utilities. However, it does not include mortgage payments, depreciation, capital expenditures, or income taxes.
3. Calculate NOI: Subtract the total operating expenses from the total income.

For example, if a property generates $100,000 in annual income and has $40,000 in annual operating expenses, the NOI would be:

NOI=$100,000−$40,000=$60,000NOI=$100,000−$40,000=$60,000

This $60,000 represents the income that the property generates after covering all necessary operating costs, but before financing and tax expenses.