Net Operating Income (NOI)

What is Net Operating Income?

Net Operating Income (NOI) is a measure of profitability and is the amount of income generated from a real estate investment after vacancy, credit losses, and operating expenses. The Net Operating Income is equivalent to EBIT (earnings before interest and taxes) in other industries. Since NOI can vary greatly depending on the month, NOI is usually looked at over the span of a year.

Net Operating Income and Cap Rates

When combined with a capitalization rate, you can derive the value of a property using NOI. For example, we use the forward 12-month NOI or trailing 3-month NOI divided by a certain cap rate to find the gross proceeds at the exit in the Top Shelf Model templates.

Value of a Property = Net Operating Income / Cap Rate

Additionally, you can rearrange the above formula to instead solve for the Cap Rate. You can calculate your going-in cap rate by taking the NOI for the first year of ownership divided by the purchase price of a property.

Cap Rate = NOI / Current Market Value

How to Calculate Net Operating Income

We can calculate the Net Operating Income by using the formula below:

Net Operating Income = Gross Operating Income – Operating Expenses

Gross Operating Income (GOI), also known as Effective Gross Income (EGI), is the amount of revenue directly generated by operating the property. If equipment used by the property or even the property itself is sold, these line items would not be considered in this calculation. See below for the calculation for GOI:

Gross Operating Income = Potential Rent Income – Vacancy & Credit Losses + Other Income (Parking Fees, Service Charges, Etc.)

Operating Expenses are costs that are directly related to operating the property. These expenses are paid by the landlord and not by the tenants. Operating Expenses don’t include debt service, income tax, depreciation, tenant improvements, commissions, and capital expenditures. See below for some of the most common line items used in the Operating Expenses calculation:

Operating Expenses = Insurance + Property Taxes + Maintenance + Utilities + Property Management Fees + Other Costs (Administrative, Advertising, Salaries, Etc.)

Operating Income vs. Net Income

Is there a difference between Operating Income and Net Income? Yes! Although they might sound very similar, Operating Income only includes revenues and expenses from operation, while net income is the bottom-line profit. Some items included in Net Income that are not included in Operating Income are non-operating income, income from investments, financing expenses, and the gain on the sale.

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About the Author

Brittany Martin is TSM’s Vice President who has developed real estate financial models for an extensive range of property types. She specializes in land, hotel, and storage models. Please reach out to her if you have any questions on Net Operating Income or if she can help you with your modeling needs.