Net Operating Income (NOI)

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 14, 2022

Define NOI in Simple Terms

Net Operating Income, or NOI, is a valuation method used by real-estate owners to determine the value of their income-generating properties.

NOI is calculated by taking the total revenue of a property and subtracting all reasonably necessary operating expenses.

It is a before-tax figure, showing up on the property’s income and cash flow statements, and it excludes payments on loans, capital expenditures, depreciation, and amortization.<h2>NOI Formula</h2> The formula for net operating income is as follows:

Where “RR”is real-state revenues, and “OE”is operating expenses.

Sources of revenue included in the NOI calculation may include rental income, parking structures, vending machines, and laundry facilities.

Operating expenses include the cost of maintaining and operating the building, including insurance, legal fees, and utilities.

NOI Example

NOI is used by real-estate investors to determine the capitalization rate of a property, which itself is a measure of the rate of return on a property investment.

For financed properties, NOI is also used to calculate the debt coverage ratio, or DCR, which tells lenders and investors whether or not a property is generating enough income to cover its debts and expense payments.

Net Operating Income (NOI) Definition FAQs

What does NOI stand for?

NOI stands for Net Operating Income.

What is Net Operating Income?

Net Operating Income, or NOI, is a valuation method used by real-estate owners to determine the value of their income generating properties.

How to calculate NOI?

Net Operating Income is calculated by subtracting a company's operating expense from its real-state revenues.

What is included in Net Operating Income expenses?

Operating expenses include the cost of maintaining and operating the building, including insurance, legal fees, and utilities.

Of what value is NOI to investment property owners?

For financed properties, NOI is also used to calculate the debt coverage ratio, or DCR, which tells lenders and investors whether or not a property is generating enough income to cover its debts and expense payments.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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