Net Operating Income
Net Operating Income (NOI) is a key financial metric in real estate that represents the income generated by a property after deducting all operating expenses, but before mortgage payments, depreciation, and income taxes. It includes rental income minus expenses like property management, maintenance, insurance, property taxes, and utilities. NOI is fundamental for property valuation and investment analysis.
Example
“The apartment building's NOI was $120,000 after collecting $180,000 in rents and paying $60,000 in operating expenses.”
Memory Tip
NOI shows how much the property earns from its "operations" - like a business, it's revenue minus operating costs (but not financing costs).
Why It Matters
NOI is the primary metric used to determine property values through cap rate calculations and is essential for comparing investment properties on an apples-to-apples basis. Lenders also use NOI to evaluate loan applications and determine maximum loan amounts for investment properties.
Common Misconception
Many confuse NOI with cash flow, but NOI doesn't account for debt service, so a property can have positive NOI while still producing negative cash flow if mortgage payments are high.
In Practice
An apartment building generating $100,000 in annual rent with $30,000 in operating expenses (maintenance, taxes, insurance, management) has an NOI of $70,000. If the local cap rate is 7%, this suggests a property value of $1 million, regardless of how the property is financed.
Etymology
"Net Operating Income" combines "net" (pure/clean), "operating" from Latin "operari" (to work), and "income" (money coming in) - literally meaning "the clean money earned from the property's work."
Common Misspellings
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