What is Net Operating Income?

Net Operating Income (NOI) refers to a financial measure used to determine the income earned by an organization from its primary activities after subtracting operating expenses. This financial measure emphasizes the profitability of the core activities carried out by a company and excludes interest payments, income tax, and other non-operating expenses.

Net Operating Income indicates the level of profitability of a company from its regular activities.

NOI is a widely used financial measure used in finance, accounting, business evaluation, and real estate.

How is the Net Operating Income Calculated?

The basic net operating income formula is:

For example, if a business generates $500,000 in operating revenue and has $350,000 in operating expenses:

NOI = $500,000 − $350,000 = $150,000

The business has a net operating income of $150,000.

Why is NOI Important?

• Property Valuation: NOI is the direct input for calculating capitalization rates, one of the most common techniques in property valuation.
• Loan underwriting: Banks measure NOI against debt service (DSCR, debt service coverage ratio) to assess whether the property has enough income to repay a loan.
• Investment decision-making: Since NOI is not affected by financing, investors can easily compare two very differently structured investment options.
• Performance measurement of a property: Increasing NOI through growing rents, reduced vacancies, or more efficient expense management indicates improved performance of the property.

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