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How Net Operating Income (NOI) Works for Real Estate Investing


Net Operating Income (NOI) is a key financial metric that is used in real estate to evaluate the profitability of an income-generating property. NOI helps real estate investors make informed decisions that could maximize their potential returns and minimize their investment risk. If you’re investing in real estate a financial advisor can help you create an investment portfolio based on your goals and needs.

What Is NOI for Real Estate Investments?

NOI is the amount of income left after deducting all operating expenses from the gross rental income. It’s a key factor in determining a property’s potential profitability, the risk associated with the investment, and the market value. NOI allows investors, with the help of a trusted financial advisor, to assess a property’s performance without considering tax and financing factors.

It’s important to note that while NOI provides a useful snapshot of a property’s operating performance, it does not account for debt service (mortgage payments), capital expenditures or financing costs. Therefore, investors often consider other metrics in conjunction with NOI to assess the overall financial health and viability of an investment property.

Why NOI Is Important for Investors

NOI is a crucial metric for real estate investors because it estimates the property’s ability to generate income after covering its operating costs. Investors often use NOI to evaluate the profitability and performance of a property, and it serves as a basis for various financial calculations in real estate investment, such as the capitalization rate (cap rate) and cash-on-cash return.

This metric can influence important real estate investment decisions when it comes to buying, selling, or holding property. For example, a property with a higher NOI could indicate that it will be more valuable because it will generate enough income after covering operating expenses.

How to Calculate NOI

A couple deciding on whether to buy a property after calculating the NOI with a financial advisor.

To calculate the NOI of a real estate investment, start with a property’s total income and deduct operating expenses.

These expenses do not include mortgage payments, capital expenditures, depreciation or taxes. Both mortgage payments and capital expenditures are excluded because they can significantly vary based on financing methods and strategic investor decisions.

Investors generally view a higher NOI favorably, as it could indicate that the property’s income is larger enough to generate profits after covering expenses. Conversely, a negative NOI signifies that the property’s expenses exceed its income, which is an important red flag to note for investors.

As an example for how NOI can be used to assess a real estate investment, let’s suppose that a rental property generates an annual rental income of $100,000. If the annual operating expenses total $40,000, the NOI would be $60,000 ($100,000 – $40,000).

Net Operating Income vs. Gross Operating Income

Gross operating income (GOI) is primarily used to assess the total income potential of a property and to estimate its gross revenue before accounting for expenses. This includes all income streams derived from the property, such as rental income, parking fees, vending machine income and other sources.

Net operating income (NOI), by contrast, is used to gauge the property’s operating profitability by accounting for all operational expenses, which thereby provides investors and stakeholders a clearer picture of the property’s financial health and potential return on investment. Operating expenses typically include property management fees, property taxes, insurance, maintenance costs, utilities and other costs necessary to run and maintain the property.

Both metrics are important in real estate analysis and play significant roles in evaluating the financial performance and investment prospects of a property.

Bottom Line

Real estate investors deciding on whether to buy a property after calculating a low NOI.

Calculating the NOI of a real estate investment can help you determine its potential profitability as it calculates the income generated from a property after deducting all operating expenses. However, using NOI as a standalone metric could also influence you to overlook crucial financial aspects affecting the property’s overall investment performance. This metric does not consider debt service, capital expenditures, or tax implications.

Tips for Real Estate Investing

  • One of the hardest things to do with real estate investing is identifying opportunities that actually work. A financial advisor can help you determine the financial picture of each property you like to see if each might work for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re not sure where to get started, consider a full guide to real estate investing so you can learn everything you need to know before putting money into the equation.

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