Net Operating Income In Real Estate (NOI)

Definition of "Net Operating Income in Real Estate (NOI)"

Shawn  Hermansen real estate agent

Written by

Shawn Hermansenelite badge icon

RE/MAX Encore II

The net operating income definition is the total profit generated by a business or real estate development after the necessary operating expenses are taken out. In order to determine the net operating income, an investor needs to subtract the operating expenses for the business from the gross operating income. 

What does the Net Operating Income in Real Estate

This valuation is used by real estate investors to determine the actual income of their properties to figure out the actual profit of a property. NOI is the figure without taxes or operating expenses that are listed on a real estate property’s cash flow and income statements. It excludes capital expenditures, amortization, depreciation, and principal and interest payments on loans. Other industries refer to this measurement as Earnings Before Interest and Taxes (EBIT), but in real estate investments, only NOI is used.

The Net Operating Income Formula in Real Estate is:

Net operating income = Real Estate Revenue (Gross operating income) - Operating expenses

So if a property could generate a potential rental income of $200,000 but wasn’t filled to capacity and only generated $150,000 (Gross operating income). The property also spent $50,000 in operating expenses that we subtract from the gross operating income of $150,000. This leavesus with $100,000 in net operating income.


Need help as a:

I'm interested to:


I'm interested to:

Reach out to the local professionals for help
I agree to receive FREE real estate advice.

Agents, get listed in your area. Sign up Now!

Here's what you'll get:

1. Full zipcodes coverage for the city of your choice for 3 months

2. The ability to reach a wider audience

3. No annual contract and no hidden fees

4. Live customer support/No robo calls

$75 - Any City - 3 Months Coverage
I agree to receive FREE real estate advice
I agree with Terms & Conditions and Section 5-5.9.

What does the Net Operating Income tell us?

As mentioned above, NOI is a way to measure the exact value generated by an income-producing property. It is an evaluation method used by real estate professionals for rental properties, residential or commercial, to determine the profit of those properties. To get to this evaluation method the real estate professional must know the gross operating income and the operating expenses of the property, otherwise, the value will not be correct. It is also important not to miscalculate and add capital expenditures to operating expenses.

NOI is also a way for real estate investors to establish the capitalization rate so that they can evaluate the value of the property. The capitalization rate also provides real estate professionals the means to compare their property or potential investment with other properties, either to see who is the better investor or look for other investments.

In case an investor considers taking out a loan to purchase a property, the NOI will help them calculate the Debt Coverage Ratio (DCR). The DCR will tell them if the income of a certain property will cover not only the operating expenses but also the debt payments.

Other evaluations that NOI can help with are Cash Return on Investment, Net Income Multiplier,and Total Return on Investment.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.


Popular Real Estate Terms

To pass property by will to an heir. Strictly speaking, real estate cannot be bequeathed to an heir, it must be devised. However, if it becomes clear the purpose of the testator was to ...

Paneled brickwork between timber quarters, a framed wall, or partition. ...

Listing of property that is open, meaning there is no one real estate agent who has the sole right to sell the property. ...

To put it simply, acquisitions are a common occurrence in the business world, and they happen to small, medium, and large businesses alike. The definition of acquisition is a company ...

The definition of acoustical materials is a wide range of materials that are used in construction or technology to provide soundproofing. There are different types of acoustic materials ...

income statement destroyed by a casualty such as a fire. This requires the reconstruction of the income statement based on source records, information, and documents. Income statement ...

Property that is unoccupied and thus not being used. It is usually raw land with no structure or improvements theron. ...

Geographic area that is attractive to prospective tenants. Square footage in an office building or apartment house that may be rented by a tenant. ...

The definition of voluntary alienation in real estate is the transfer of the residency rights or deed of a property between two parties without the use of extraneous legal measures. Unlike ...

Popular Real Estate Questions