Net Operating Income, commonly abbreviated NOI, is an important number for anyone invested in real estate as it’s a direct measure of a property’s financial performance. It can help you understand the economic health of a property and determine whether or not it’s a smart investment.
One of the key steps to ensuring the NOI is accurate on any given property, is making sure that all revenue generated and expenses are accurately recorded when your monthly real estate bookkeeping is completed.
To calculate the Net Operating Income (NOI) in real estate, you will need to gather information about the property’s income and expenses. The NOI formula is:
NOI = Gross Rent Revenue – Operating Expenses
Gross Rent Revenue is the total amount of rent collected from tenants before any deductions.
Operating Expenses include all costs associated with maintaining and operating the property, such as property taxes, insurance, utilities, and repairs. These expenses are typically recurring costs that are incurred on a regular basis.
However, not all expenses associated with the property are included in operating expenses. Some expenses are considered non-operating expenses and are not included in the calculation of the property’s Net Operating Income (NOI).
Some examples of expenses that are not typically included in operating expenses are:
It’s important to note that these expenses can still have an impact on the property’s overall financial performance, but they are not considered when calculating the NOI.
A property has an annual gross rent revenue of $120,000 and annual operating expenses of $60,000.
NOI = $120,000 – $60,000 = $60,000
The NOI for this property is $60,000.
A good Net Operating Income (NOI) for real estate can vary depending on the type of property and location. In general, a higher NOI is considered better, as it indicates that the property is generating more income than expenses.
A property with a positive NOI is considered to be cash flow positive, which means it generates enough income to cover its operating expenses and provide a return on investment to the owner. On the flip side, a negative NOI indicates that the property is cash flow negative.
In general, commercial properties such as office buildings, retail centers, and warehouses tend to have higher NOI than residential properties such as apartments or single-family homes.