Net Operating Income (NOI) is a key metric in the real estate investment industry that represents the total revenue generated from a property, minus the operating expenses. It is used to evaluate the profitability and potential return on investment for a real estate asset.
Here’s a breakdown of what NOI includes and how it’s calculated:
- Total Revenue: This includes all the revenue generated from the property, such as rents collected, fees, and any other income sources related to the property.
- Operating Expenses: These are the costs necessary to run and maintain the property. They include things like property management fees, maintenance, utilities, insurance, property taxes, and other expenses that are required to operate the property. Operating expenses do not include mortgage payments, depreciation, or capital expenditures.
The formula for NOI is:
NOI = Total Revenue − Operating Expenses
NOI is an important metric for investors because it provides insight into the property’s ability to generate income. It is often used to determine the value of the property, the cap rate, and the potential return on investment. A higher NOI generally indicates that the property is generating more income relative to its operating expenses, which may make it more attractive to potential investors. Conversely, a low or negative NOI might indicate problems with the property’s ability to generate revenue, excessive operating expenses, or other issues that could impact its profitability.