Net Operating Income (NOI) Calculator: How to Calculate NOI & What it Means
NOI, or Net Operating Income, measures the profitability of an income-generating real estate asset (i.e. rental property). It’s calculated by subtracting operating expenses from the total revenue generated. NOI is a great way to see a property’s income potential, but it should be used in tandem with other real estate valuation metrics when making investment decisions.
Net Operating Income Calculator
One of the first things investors consider before pulling the trigger on a potential investment property is a property’s income potential. In other words, how much money will you be left with after you collect rent and pay for the day-to-day expenses needed to run your property? The finance term for this is net operating income, or NOI. NOI is one of the most fundamental metrics used in real estate investing - it’s important to understand because it tells you whether or not a property will be profitable.
What is Net Operating Income (NOI)?
Net Operating Income, NOI, is a valuation method real estate investors use to determine the value of a given rental property. NOI is best thought of as an unlevered, pre-tax measure of profitability (“unlevered, pre-tax” is just a fancy way of saying we don’t consider income taxes and financing costs when calculating it). NOI is particularly important because it’s an input for metrics like capitalization rates and debt coverage ratios.
How to Calculate Net Operating Income (NOI)
Net operating income (NOI) is defined as the income generated from a property after accounting for all the expenses related to operating that property. In short, it’s revenues minus operating expenses.
Net Operating Income (NOI) =
Total Revenue - Operating Expenses
When calculating the first term in NOI, it’s important to remember to include all revenues generated by a given rental property - this includes not only rents collected but also ancillary sources of revenue like parking permits, key replacement fees, laundry fees, etc.
Similarly, when calculating the second term of NOI, it’s important to remember to exclude all non-operating expenses. This means we do include things like property management fees, repair and maintenance costs, property taxes, legal fees, janitorial services, doorman salaries, and insurance costs. We exclude capital expenditure, or CapEx, costs like HVAC upgrades and new air conditioners. Since NOI is an unlevered, pre-tax metric, we also exclude financing costs (like mortgage payments) and any income taxes we may owe.
Let’s try to better understand this through an example. Say a property’s revenue and expenses are as follows: annual rents ($100,000), janitorial costs ($5,000), property taxes ($20,000), laundry machine fees ($1,000), fees for new keys ($1,000), parking passes ($2,000), doorman salaries ($25,000), management fees ($5,000), and repair and maintenance costs ($5,000). Let's find out this property's NOI by using the above mentioned method.
First, let's find our revenue:
Revenue =
rents + laundry fees + key fees + parking fees
Revenue =
$100K + $1K + $1K + $2K
= $104K
Next, let's calculate our operating expenses:
Operating Expenses (OpEx) =
janitorial +property taxes + doorman + mgmt + repairs
Operating Expenses (OpEx) =
$5K + $20K + $25K + $5K + $5K
= $60K
Putting all of this together, we get:
Net Operating Income (NOI) =
Revenue - OpEx
= $104K - $60K
= $44K
After accounting for all of our operating expenses, we’re left with $44K - this is our NOI. Note that this doesn’t always have to be positive. If your operating expenses are greater than your revenue, the above calculation would yield a negative value and thus be called a Net Operating Loss (NOL).
What It Tells Us: In the example above, our property has a NOI of $44K. Our NOI is essentially the amount of money we have to put towards financing costs (like loan payments if we financed the property) or take home as profits. If we, for instance, didn’t have to take out a loan to purchase the property, $44K would represent our profit. We could use these profits to improve the property in an attempt to force the property to appreciate - this investment would be considered CapEx, or Capital Expenditure, and would not be taxed. Or, we could also claim the entire $44K as income - we’d, of course, pay income taxes on it and then take the rest home.
In short, NOI helps us assess the profitability of a property. The higher the revenues and the smaller the expenses, the larger our NOI. This said, since NOI is an unlevered pre-tax metrics, investors should consider other factors when deciding if owning and operating a property is worth the cost.