Net operating income (NOI) is a valuing approach used by real estate experts to calculate the exact value of their revenue-producing assets. A property may produce revenue via utilities such as parking garages, vending machines, and laundry facilities in addition to rental revenues.

NOI is a frequently used metric to evaluate a property's performance. The computation comprises deducting all property-related operational costs from any income the property has produced. A property is more lucrative when its revenues are higher and its expenses are lower.

The costs of managing and maintaining the facility are included in operating expenses, which include insurance premiums, legal fees, utilities, property taxes, maintenance charges, and housekeeping fees. Capital expenses, such as the cost of a new air-conditioning system for the entire building, are not factored in.


What is Net Operating Income (NOI)?

Net operating income (NOI) is a metric used to assess the viability of income-producing real estate assets. NOI is the sum of all commercial property revenue minus all required operational expenses. NOI is a pre-tax figure on a property's income and cash flow sheet and eliminates loan principal and interest, capital spending, depreciation, and amortization. In other industries, this concept is referred to as "EBIT" (earnings before interest and taxes).


How to Calculate Net Operating Income

Subtract operating expenses from revenue received by a property to determine net operating income. Rental money, parking, service, vending machines, laundry machines, and so on contribute to commercial real estate revenue. All expenditures related to running the property are included in the operating expenses.

Net Operating Income = RR − OE (where RR = real estate revenue, OE = operating expenses)

Example: a condo complex with rental income of $20,000, parking fees of $5,000, and laundry machines of $1,000 — total revenues of $26,000. Operating expenses: property management fees $1,000, property taxes $5,000, repair and maintenance $3,000, insurance $1,000 — total operating expenses of $10,000. NOI = $26,000 − $10,000 = $16,000.


Factors That Affect Net Operating Income

Several factors influence NOI, including insurance, property tax, property management fees, the condition of the property, and maintenance. Generated revenue affects it as well.


Uses of Net Operating Income

  • Determine the capitalization rate of a property (return on investment in real estate).
  • Determine loss to lease and tenant reimbursement.
  • Assess how well the property is managed.
  • Determine a property's performance.
  • Frequently used to approve commercial loans for real estate investors.


Pros and Cons of Investing in a Property with High or Low Net Operating Income

Pros: helpful for investors to understand what to anticipate in terms of recurring income; lenders might use NOI to determine whether a property is a risky investment.

Cons: NOI will suffer if predicted rents turn out to be incorrect; since it relies on how the property is handled, NOI might fluctuate greatly.


How to Improve Your Commercial Property's Net Operating Income

Examining how your properties are currently used and maintained is the first step. Superior quality properties require less upkeep — particularly expensive emergency maintenance — and allow you to charge more per square foot. Start by speaking with building operators and facilities staff to understand how things are currently operating.

Preventive maintenance involves a small initial investment but enables your teams to stay ahead of problems and increase the lifespan of facility assets, resulting in long-term cost savings. Deferred maintenance is another area where modest initial inputs can significantly increase facility quality and NOI — as a pending-repairs list grows, more repairs and failures occur, raising maintenance costs.

Capital improvements should be your last consideration — expensive one-time charges, but with long-term savings that don't affect your NOI estimate. An old HVAC system or water heater can increase utility expenses by hundreds of dollars a month, so knowing which capital investments are impending and carry the most risk helps you spend your funds properly.


Examples of Properties with High or Low Net Operating Income

A net operating loss (NOL) happens when operating costs exceed revenues and the sum is negative. Example: annual revenue of $120,000 and running expenses of $80,000 results in NOI of $40,000.

Creditors and commercial lenders rely on NOI to assess a property's capacity to produce revenue even more than they do an investor's credit history when making decisions.

Another example: gross operating income of $10,000 plus $2,000 in miscellaneous income totals $12,000; with running costs of $4,000, NOI is approximately $8,000. However, with several vacancies bringing total income down to $4,000 while fees remained at $10,000, NOI would be negative $6,000 instead.