Net Operating Income, or NOI, is a measure of a commercial real estate asset’s profitability, calculated by subtracting all property level operating expenses from all revenues generated by the property. It does not take into consideration capital expenditures, leasing costs, taxes on income generated, or costs of financing (principal or interest). Net Operating Income is one of the fundamental financial metrics in real estate analysis, and appears in several different calculations that help describe a property’s value, including the Cap Rate, Internal Rate of Return (IRR), and Cash on Cash Return (ConC). An example of how Net Operating Income is calculated is found below:
Revenue:
- Rental income: $25,000
- Parking income: $4,000
- On site billboard: $1,000
Total Revenues: $30,000
Operating Expenses:
- Property Management Fees: $2,000
- Insurance: $2,000
- Repairs and Maintenance: $1,000
Total Operating Expenses: $10,000
In this example, Net Operating Income for this commercial real estate asset would be calculated as $30,000 less $10,000, or $20,000.