What Is Included in Net Operating Income (NOI)?

Net Operating Income (NOI) is a fundamental financial metric for evaluating real estate investments. It provides a clear picture of a property’s profitability from its operations, isolating income generated before financial or tax impacts.

Defining Net Operating Income (NOI)

Net Operating Income (NOI) represents the income a property generates after deducting all operating expenses. This metric is a pre-tax and pre-debt indicator, excluding mortgage payments, income taxes, and capital expenditures.

Gross Income: The Revenue Side of NOI

The gross income component of NOI encompasses all revenue streams directly generated by the property. The primary source is rental income from residential or commercial tenants. Other income sources include parking fees, income from on-site laundry facilities or vending machines, and storage unit fees.

Miscellaneous income, such as pet fees or application fees, also contributes to gross income. Potential vacancy and credit losses, representing uncollected income due to unoccupied units or unpaid rent, must also be accounted for.

Operating Expenses: The Deductions from Gross Income

Operating expenses are the recurring costs associated with the day-to-day operation and maintenance of a property, which are deducted from gross income to arrive at NOI. These expenses keep the property functional and generating revenue. Common operating expenses include property taxes, assessments levied by local jurisdictions, and property insurance premiums, covering potential damage and liability.

Included Operating Expenses

Utilities, if paid by the property owner for common areas or shared services, are considered operating expenses. Property management fees, typically ranging from 4% to 10% of gross rental income for residential properties, cover the costs of professional management. Routine maintenance and repairs, such as landscaping, cleaning services, and minor upkeep, are necessary for ongoing operations. Costs for advertising vacancies and administrative expenses, like office supplies, fall under operating expenses.

Excluded Expenses

Certain significant expenses are specifically excluded from NOI calculations, providing a clearer picture of operational profitability. These exclusions include debt service, which consists of mortgage principal and interest payments, as these relate to the property’s financing structure rather than its direct operation. Income taxes are also excluded because they are specific to the owner’s financial situation and are not a property-level operating cost. Capital expenditures, which are major improvements that extend the property’s useful life or add significant value, like a new roof or a major renovation, are not factored into NOI. Additionally, depreciation, a non-cash accounting expense, is excluded from NOI as it does not represent an actual cash outflow for the property’s operation.

The NOI Calculation

Calculating Net Operating Income involves a straightforward formula that combines the property’s total revenue with its operational expenditures. The calculation is Gross Income minus Operating Expenses, yielding the Net Operating Income. This formula provides a clear metric for assessing a property’s financial performance.

For example, consider a property that generates $150,000 in gross income from rent and other property-related fees over a year. If the total annual operating expenses for this property, including taxes, insurance, and maintenance, amount to $60,000, the NOI calculation would be direct. Subtracting the operating expenses from the gross income ($150,000 – $60,000) results in a Net Operating Income of $90,000. This figure represents the income the property produces before financing costs or income taxes.