What is Net Operating Income (NOI)?
NOI shows the revenue and profitability of an invested real estate property after deducting necessary operating expenses.
Real Estate investors must know how to calculate Net Operating Income (NOI) as it is one of the most important calculations in that industry. Net Operating Income, or NOI for short, is a formula used by real estate professionals to quickly calculate the profitability of a specific investment. The formula is:
Net Operating Income = (Gross Operating Income + Other Income) – Operating Expenses
After deducting necessary operating expenses, NOI determines the revenue and profitability of an investment real estate property.
NOI helps real estate investors in calculating the capitalization rate, which in turn helps in calculating a property value; which, helps them to compare different properties they may be considering buying or selling.
NOI is also used in the debt coverage ratio (DCR) for financed properties, which tells lenders and investors whether a property’s income covers its operating expenses and debt payments. The net income multiplier, cash return on investment, and total return on investment are all calculated using NOI.
Assume you own a property that generates $260,000 in revenue and incurs $95,000 in operating expenses each year. In this case, the resulting NOI will be $1,65,000 ($2,60,000 – $95,000). If the total is negative, indicating that operating expenses exceed revenues, the result is referred to as a net operating loss (NOL).
Creditors and commercial lenders rely heavily on NOI to determine the income generation potential of a mortgaged property, even more than they consider an investor’s credit history. Simply put, these metric assists lenders in determining the initial value of a property by forecasting its cash flows.
If a property is deemed profitable, lenders will use this figure to determine the amount of loan they are willing to make. If the property, on the other hand, shows a net operating loss, lenders are likely to reject the borrower’s mortgage application outright.
Property owners can manipulate their operating costs by deferring some and accelerating others. NOI can also be increased by increasing rents and other fees
Did you know?
The Nimblefincorp team can assist you in accurately calculating your NOI so you can see where your company stands in the market.
You can even get free consulting. Try it out right now.