Net operating income (NOI) is a property's income after being reduced by vacancy and credit loss and all operating expenses. Mathematically, it is a property's gross operating income less the sum of all operating expenses.
NOI represents a property's profitability before consideration of taxes, financing, or recovery of capital. Perhaps easier is to think of it as the number of dollars a property returns in a given year if the property is purchased for all cash and if there is no consideration of income taxes or deprecation.
NOI is one of the most important calculations you'll make in regard to any real estate investment. NOI is at the center of almost every landlord's discussion. It represents an essential component of many further calculations.
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. 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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