Real estate investors and lenders use Net Operating Income (NOI) for evaluating the performance of property investments. Multifamily investors use this as a critical benchmark.
What is NOI? This calculation comes from an investment’s income and cash flow statements. All operating income minus all operating expenses. It does not include interest, depreciation, or income taxes.
It’s important to capture all operating expenses associated with the investment. Otherwise, the property may appear more profitable which might lead to a higher market value than warranted.
Operating expenses can include property taxes, property insurance, management fees, utilities, repairs and maintenance, and professional fees such as legal, accounting, etc.
A negative number represents a loss and should be investigated to determine the cause. Compare the current net operating income to previous periods to track the trend.
Lenders use net operating income to evaluate a property to determine if there is sufficient cash flow from operating the property to cover a loan.
NOI is essential to calculating the capitalization rate (CAP rate). The CAP rate is used to determine the return on the owner’s investment capital.
The purpose of purchasing an investment property is to generate income. Net operating income is the primary ratio for evaluating.