What Is Net Operating Income (NOI)?
Net Operating Income, or NOI, is a formula that is used to calculate the profitability of an apartment property. More specifically, NOI determines the revenue and profitability of an investment property after subtracting all operating expenses.
Calculating NOI correctly only works when all income a property makes is taken into consideration, and all of the general expenses accrued during operation are subtracted. The total income of a property comes from various sources such as tenant rents, parking fees, coin laundry machines, etc. In terms of operating expenses, these aren’t only maintenance fees, but everything from insurance to professional help.
The true worth of NOI is that it takes all of the inflow and outflow of cash into consideration into one simple calculation.
Net Operating Income (NOI)is $15,500
- The higher the net operating income is compared to the property price, the easier it is to find financing.
The Net Operating Income Formula
The formula for NOI is:
(Gross Operating Income + Other Income) - Total Operating Expenses = Net Operating Income
How To Calculate Net Operating Income
An accurate NOI can only be achieved if the right components are used in its calculation. The property’s gross income, for example, should not be calculated lightly or simply estimated, as this would give a false NOI. While each property is unique and has different income producing components, as well as different operating expenses, here a few, not all, but a few areas to keep in consideration when attempting to calculate NOI:
Gross Operating Income (GOI)
Potential Rental Income - Vacancy Rates = Gross Operating Income
To assume that a property’s gross income is something that can be observed by simply looking at the rent roll is detrimentally false. The gross operating income of an apartment property is designed to also mathematically account for fluctuations and possible outcomes regarding a property’s income.
That said, there are a few figures to consider for GOI:
Potential Rental Income
Potential rental income (PRI) represents the amount of income an apartment owner would make if the property was 100% leased, 100% of the time.
Vacancy And Credit Losses
Since a building being 100% occupied with zero vacancies is a rare scenario, GOI factors in vacancy and credit losses in relation to potential rental income.
NOI is supposed to take into account all income, which is the GOI in addition to any additional income a property makes. Income producing properties can make money in many more ways than just through tenant rent. For example, additions such as vending machines, an additional parking lot, and of course the aforementioned coin laundry setup all produce additional income for the property owner that should be considered when calculating NOI.
The same precision and accuracy that should be given to identifying sources of income should also be dedicated to tracking operating expenses. Getting an accurate NOI calculation is dependent on knowing how much it actually costs to own the property. Some operating expenses to consider in NOI calculations are:
- Maintenance/Repair Costs
- Property Taxes
- Property Management
- Miscellaneous Fees: accounting and attorney fees, marketing costs, etc.