What is Net Operating Income?
Definition
Net operating income (NOI) is used in the real estate market to determine the revenue that a property generates less operating expenses. NOI also determines a property's capitalization rate, or rate of return.
Why it Matters
NOI is simply the annual income generated by an income-producing property after taking into account all income collected from operations, and deducting all expenses incurred from operations.
Real estate investors and lenders are primarily interested in a rental property’s NOI because it represents the amount of cash flow (or funds available) to pay the mortgage.
As a result, NOI impacts rental property market values, financing considerations, and a variety of real estate investment and holding period decisions.
A property may generate its revenue from rent, parking, utility submetering and servicing fees. A property's operating expenses include property maintenance fees, insurance, utility costs, property taxes and janitorial fees.
In order to improve NOI, property managers can increase revenues, decrease costs, or both.
Improved NOI also has an effect on asset value. As NOI improves, there is a multiplier effect on asset value. The exact multiple depends on the cap rate of the property.