Understanding the financial health of a business or investment property is crucial for making wise investment decisions. One key indicator that can help is net operating income (NOI). In this article, we’ll explore what net operating income is, why it’s essential, and how to calculate it.

What is Net Operating Income?

Net operating income is a profitability metric that measures the difference between a property’s revenues and its operating expenses. It’s an essential calculation for real estate investors, as it shows the revenue potential of an investment property after accounting for all necessary expenses.

NOI helps assess the profitability and efficiency of a rental property or overall operations of a business. It gives investors a clear picture of how much money a property or business generates after considering all operating costs.

How to Calculate Net Operating Income

There are different ways to calculate NOI, but in this guide, we’ll focus on using the following formula:

Net Operating Income (NOI) = Gross Operating Income – Operating Expenses

1. Determine Gross Operating Income (GOI)

The first step is to calculate the gross operating income (GOI). Gross operating income represents the total revenue generated by the property or business before deducting operating expenses.

For a rental property, GOI includes rent from tenants, fees from parking spaces or storage units, and other miscellaneous income sources tied to the property. For a business, GOI would encompass all revenues generated during regular operations.

GOI = Total Revenue

2. Determine Operating Expenses

Next, establish your operating expenses. These are costs associated with running and maintaining the property or business that are unavoidable. They can include:

– Property management fees

– Utilities

– Property taxes

– Insurance premiums

– Maintenance and repairs

Operating expenses do not include loan payments or any capital expenditure items such as major renovations or building additions.

3. Calculate Net Operating Income

Lastly, subtract your operating expenses from your gross operating income to calculate the net operating income:
NOI = GOI – Operating Expenses

Why is Net Operating Income Important?

Net operating income is critical for several reasons:

– NOI allows investors to gauge the profitability of a property or business.

– It helps in calculating capitalization rate, an essential metric for valuing properties and determining the potential return on investment.

– Lenders often use NOI to assess a borrower’s ability to repay loans tied to a property or business.

In conclusion, calculating net operating income is vital for investors and businesses alike. It offers valuable insights into financial health and growth potential, enabling well-informed decision-making and increased confidence in investment choices. By understanding how to calculate NOI, you will be better equipped to analyze your investments or operational efficiency effectively.