What Is Net Operating Income? 

Net operating income is a metric representative of the profitability of a commercial property. More accurately, NOI represents the revenue and profitability of a commercial real estate asset after all operating expenses have been subtracted. Net operating income is a highly valuable metric for investors because it accounts for all of an asset’s inflow and outflow of cash in one simple calculation.

Net Operating Income Calculator

Net Operating Income Formula

The formula for NOI is:
⁠Net Operating Income = (Gross Operating Income + Other Income) - Total Operating Expenses

Components of the Net Operating Income Calculation for Real Estate

The accuracy of an investment property’s net operating income is wholly dependent on the right components being used in its calculation. Getting an accurate NOI measurement can only be accomplished when all of an asset’s income is taken into consideration, and all of the asset’s general operating expenditures are subtracted. The operating income, for example, should not be incorrectly rounded or estimated. The figure should account for all of a property’s income sources, such as tenant rents, parking fees, vending machine revenues, and so on. Operating expenses go beyond maintenance fees and must include everything from insurance to the contracting of third-party professionals.

While some of these components may appear insignificant compared to rental revenues, each must be included in your NOI calculation. Excluding them would lead to a false or misleading net operating income. Each commercial real estate asset is unique in its various income-producing components and its operating expenses. Below are a few crucial components to consider before determining your NOI.

Gross Operating Income (GOI)

The gross operating income of an asset accounts for occupancy fluctuations and the possible impacts on a property’s income.

The formula for gross operating income is:
⁠Gross Operating Income = Potential Rental Income - Vacancy Cost

Potential Rental Income (PRI)

Potential rental income represents the amount of income an investor would make if the asset were 100% occupied, 100% of the time. The PRI calculation is essential to determine gross operating income.

Other Income

NOI takes all of an asset’s income into account, which is the GOI plus any additional income a property generates. It is quite common for commercial real estate assets to have income outside of rents. Vending machines, paid parking spaces, and even coin laundries are common examples of alternative sources of income for a property that should be included in an NOI calculation.

Operating Expenses

The same due diligence given to identifying sources of income should also be dedicated to the accounting of operating expenses. Operating expenses can vary wildly from asset to asset, but some of the more common aspects to consider in NOI calculations are:

• Maintenance/repair costs

• Insurance

• Property taxes

• Property management

• Accounting fees

• Attorney fees

• Marketing costs

Using NOI to Determine Cap Rate

An asset’s net operating income is a key factor in the determination of the asset’s capitalization rate. Much like NOI, the cap rate is a metric used by investors to assess the profit potential of a particular investment. Cap rates are determined by taking the net operating income of a property and dividing it by the purchase price of the asset. The formula for cap rate looks like this:
⁠Capitalization Rate = Net Operating Income ÷ Purchase Price