Net operating income (NOI) is a property's income after being reduced by vacancy and credit loss and all operating expenses. When this is calculated, we will use the current sum of operating expenses and subtract it from the property's total gross operating income.
Net operating income serves as the representation of the property's profitability before considerations of taxes or financing. Perhaps it is easier for readers to think of this in terms of the number of dollars that the property is going to be able to return in a given year if the property is purchased for all cash and if there is no consideration of income taxes or deprecation.
Net operating income is going to be one of the most important calculations that you will ever make when it comes to any real estate investment. Net operating income remains at the center of almost every discussion that a landlord will participate in when it comes to the future of their property. It also represents an essential component of many further calculations you will find in our LEARN section.
In order to calculate NOI correctly, you must be clear about what is and what is not an operating expense. An operating expense is one that is necessary for the maintenance of a piece of real estate property and ensures its continued ability to produce income, such as property insurance and taxes, repairs, utilites, and management fees. Loan payments, depreciation, and capital expenditures are not considered operating expenses.
How to Calculate Net Operating Income of an Investment Property
- Determine gross operating income which is explained in a separate article.
- Count all operating expenses of a property. Remember that depreciation and capital expenditures aren't operating expenses.
- Subtract these two numbers as shown in the formula:
Excel Spreadsheet Example
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