How to Find the Net Operating Income

Net Operating Income (NOI) is a fundamental financial metric, particularly relevant in real estate and business valuation. It measures a property’s or business’s profitability from its core operations. Investors, buyers, and sellers use NOI to assess an asset’s financial performance before considering certain non-operating expenses.

Identifying Income Sources and Operating Costs

Calculating Net Operating Income begins with identifying all revenue streams and operational expenditures. Gross Operating Income represents the total revenue generated by a property or business. For real estate, this typically includes rental income, parking fees, laundry income, and vending machine income. For businesses, this could encompass service fees or other direct revenue streams. Effective gross income accounts for potential income loss due to vacancies or uncollected payments.

Operating costs are the routine expenses necessary for the day-to-day functioning and maintenance of the property or business. These commonly include property taxes, insurance premiums, and utilities such as electricity, water, and gas. Routine maintenance and repair expenses are also included. Property management fees, cleaning services, and general administrative expenses are considered operating costs.

The Net Operating Income Formula

The Net Operating Income (NOI) calculation provides a clear measure of a property’s operational profitability. The core formula is: Net Operating Income = Gross Operating Income – Total Operating Expenses. This calculation synthesizes the income and expense data gathered from the operational aspects of the asset.

To apply this formula, first determine the total Gross Operating Income by summing all identified revenue streams for a given period. Next, calculate the Total Operating Expenses by adding up all the routine costs associated with running the property or business during that same period. Subtract the Total Operating Expenses from the Gross Operating Income to arrive at the Net Operating Income. For example, a property with an annual Gross Operating Income of $100,000 and total operating expenses of $38,000 (including taxes, insurance, utilities, maintenance, and management fees) would have a Net Operating Income of $62,000 ($100,000 – $38,000).

Exclusions from Net Operating Income

Certain financial items are deliberately excluded from the Net Operating Income calculation to ensure it reflects only the operational performance of the property or business. Debt service, which includes principal and interest payments on mortgages or other loans, is not factored into NOI. These are financing costs tied to the owner’s capital structure rather than the direct operation of the asset itself.

Income taxes, whether federal, state, or local, are also excluded from NOI. These taxes depend on the owner’s specific tax situation and overall financial profile, not the property’s operational efficiency. Depreciation, a non-cash accounting expense, is another exclusion. Capital expenditures, which are significant investments for major improvements or replacements, are not included in operating expenses. These are considered investments in the asset’s long-term value, distinct from routine operational costs.