Definition of Net Operating Income
Net operating income (also known as NOI) is a calculation used to analyze real estate investments that generate income. To calculate a property’s NOI, an investor must subtract all reasonably necessary operating expenses from revenue, and the balance is the NOI profit. Net operating income does not include the deduction of debt and mortgages.
Why is this term important?
The net operating income calculation offers investors a way to directly compare the revenue return of real estate properties, even if those properties do not share similar characteristics. For instance, an investor may be torn between buying a triplex or a small commercial strip mall that offers retail space on the first floor and residential apartments on the second floor. Using NOI, the investor could determine which real property investment would generate a better annual return, all things being equal.
Examples of term
In a triplex where the landlord is required to pay utilities, the net operating income would equal all rental income minus the cost of hydro, heat, water and property taxes for that property. It would not take into consideration the mortgage payments the landlord would be required to pay.