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What is Net Operating Income (NOI)?
Net Operating Income (NOI) is a key financial metric used primarily in real estate to measure the profitability of income-producing properties. It represents the income remaining after subtracting all operating expenses from gross income, excluding taxes, interest, depreciation, and amortization.
Definition
Net Operating Income (NOI) is the total revenue generated by a property minus all reasonable operating expenses required to maintain and operate that property.
Key takeaways
- Used in real estate valuation: Essential for determining investment property returns.
- Excludes financing and taxes: Focuses purely on property performance.
- Determines cap rate: A core input for market valuation.
- Indicates operational efficiency: Shows how well a property generates income after expenses.
Formula
NOI = Gross Operating Income – Operating Expenses
Example:
- Gross income: P1,200,000
- Operating expenses: P300,000
NOI = 1,200,000 – 300,000 = P900,000
What’s included in NOI?
Operating Income
- Rental income
- Parking fees
- Service charges
- Other income (laundry, vending, amenities)
Operating Expenses
- Property management fees
- Maintenance and repairs
- Utilities (if owner-paid)
- Insurance
- Property taxes (varies by jurisdiction)
- Marketing and leasing costs
What’s not included in NOI?
- Mortgage payments
- Interest expenses
- Depreciation
- Amortization
- Capital expenditures (CapEx)
- Income taxes
Why NOI matters
1. Property valuation
Used to calculate capitalization rate (cap rate):
Cap Rate = NOI / Property Value
2. Investment analysis
Helps investors compare potential returns across properties.
3. Performance benchmarking
Shows operational health and efficiency.
4. Lending decisions
Banks use NOI to assess loan eligibility.
Factors affecting NOI
- Occupancy rates
- Rental pricing
- Market conditions
- Maintenance costs
- Management efficiency
NOI vs. EBITDA
| Metric | NOI | EBITDA |
|---|---|---|
| Sector | Real estate | Corporate/financial |
| Includes revenue from | Property operations | All business operations |
| Excludes | Taxes, interest, CapEx | Taxes, interest, depreciation |
| Purpose | Property valuation | Business performance |
Related concepts
- Capitalization rate
- Gross operating income
- Operating expenses
- Real estate valuation
- Cash flow analysis
Sources
- CCIM Institute – Commercial Real Estate Insights
- Investopedia – NOI Guide
- National Association of Realtors (NAR)
Frequently Asked Questions (FAQ)
Is NOI the same as cash flow?
No. Cash flow also subtracts financing costs and capital expenditures.
Does NOI include property taxes?
In most cases, yes, classified as an operating expense.
Can NOI be negative?
Yes, if a property’s expenses exceed its income.
How often is NOI calculated?
Typically annually but can be analyzed monthly or quarterly.
Is NOI used for residential property?
Mainly for commercial real estate but can apply to rental properties.
