Net Operating Income - Explained
What is Net Operating Income?
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Table of ContentsWhat is Net Operating Income?How is Net Operating Income Used?Example of How to Use Net Operating IncomeAcademic Research on Net Operating Income - NOI
What is Net Operating Income?
All revenue generated by a company after the operating expenses are deducted gives the Net Operating Income (NOI) of an investment or company. NOI is used in accessing how profitable a business or an investment is. Usually, this calculation method is used in real estate and investment industry. It is the income that a company or an investment generates after expenses are deducted, excluding taxes and interest deductions. Hence, NOI is regarded as a before-tax income of a company. In a typical arrangement, NOI is calculated annually, it takes into account the income realized by a company after certain costs incurred have been deducted. To calculate the Net Operating Income (NOI) of a company or an investment, the formula below is used: Net operating income = Real estate revenue Operating expenses (This means the total revenue minus the operating expenses gives us the net operating income). Key Takeaways
- The profitability of an investment can be measured using the NOI.
- NOI is realized by deducting the operating expenses of the investment from the total income or revenue generated from the investment.
- Capital expenses and taxes are not included when calculating a NOI.
How is Net Operating Income Used?
In real estate investments, investors determine the profitability of an investment through NOI. How much revenue a property generates is also estimated. Since the operating costs are deducted from the revenue generated from an investment before the NOI is realized, investors consider how much operating expenses a property can incur. Maintenance fees, utility costs, management fees, running and repair costs among others sum up to the operating expense. Through NOI, investors and owners of commercial properties are able to know the value of the property. This calculation is helpful, especially in making investment decisions pertaining to the commercial real ESTATE. Furthermore, an investor can determine whether or not the income generated from the property is sufficient to offset all debt payments, alongside operating expenses through NOI.
Example of How to Use Net Operating Income
Generally, the income generating capacity of a property in the commercial real estate is determined through NOI. Below is an example of NOI; If the income generated by a property for a year is $300,000 and the operating expenses of the same property is $130,000, using the formula for calculating NOI, the NOI of the property will be: NOI: ($300, 000 - $130,000) = $170, 000 The profitably of the property is determined using NOI. However, it is possible to have an operating expense that will be higher than the revenue generated by the property or investment. When this happens, NOL is realized, this is net operating loss.