What Is Net Operating Income – NOI?

According to Will Kenton posted on Investopedia Net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. NOI is a before-tax figure, appearing on a property’s income and cash flow statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization.

The Formula:

In commercial real estate, revenues most often come from sources including rent, parking fees, and other service fees. Operating costs for a commercial property can include building and grounds maintenance, janitorial fees, utilities, insurance, and property management or legal fees. The total operating costs are subtracted from the total revenue in order to determine the property’s NOI.

NOI helps real estate investors determine the capitalization rate, which in turn helps them calculate a property’s value, thus allowing them to compare different properties they may be considering buying or selling.

For financed properties, 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. NOI is also used to calculate the net income multiplier, cash return on investment, and total return on investment.

Commercial lenders heavily rely on NOI to determine the income generation potential of the property to be mortgaged, even more than they factor an investor’s credit history into their decisions. Simply put: this metric helps lenders fundamentally assess the initial value of the property, by forecasting its cash flows. If a property is deemed profitable, the lenders also use this figure to determine the size of the loan they’re willing to make. On the other hand, if the property shows a net operating loss, lenders are likely to reject the borrower’s mortgage application, outright.

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