Net operating income

What is net operating income?

Net operating income, or NOI, is a real estate investing metric that measures the profitability of an investment property before taxes and other expenses are factored in. To calculate NOI, simply take the property's gross income and subtract all operating expenses, including things like insurance, repairs, and property management fees. The resulting number is your net operating income.

How is net operating income calculated?

To calculate a property's NOI, simply take its gross income and subtract all operating expenses. Operating expenses can include things like insurance, repairs, and property management fees. The resulting number is your net operating income.

What are the benefits of net operating income?

There are a few key benefits of using NOI to evaluate real estate investments.

  • NOI is a good metric for comparing properties of different sizes. For example, if two properties have the same NOI, they are equally profitable regardless of whether one is twice the size of the other.
  • NOI is a good metric for comparing properties of different types. For example, if two properties have the same NOI, they are equally profitable regardless of whether one is an office building and the other is a retail store.
  • NOI is a good metric for comparing properties in different locations. For example, if two properties have the same NOI, they are equally profitable regardless of whether one is in New York City and the other is in a small town.

What are the drawbacks of net operating income?

There are a few potential drawbacks to using NOI as your sole metric for evaluating real estate investments.

  • NOI does not take into account the effects of taxes and other non-operating expenses, which can be significant in some cases.
  • NOI does not take into account the effects of leverage. For example, if you buy a property with a mortgage and your mortgage payments are $1,000 per month, your NOI will be lower than if you bought the same property with cash.
  • NOI does not take into account the effects of inflation. For example, if you buy a property for $100,000 and its value increases to $110,000 due to inflation, your NOI will not increase unless you also increase the rent.

How can net operating income be improved?

There are a few ways to improve a property's NOI.

  • You can increase the rent.
  • You can decrease the operating expenses. This can be done by increasing efficiency, negotiating better deals with vendors, or cutting unnecessary expenses.
  • You can increase the occupancy rate. This can be done by marketing the property to a wider audience, offering incentives to tenants, or improving the property itself.

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