Your “Net Operating Income” or “NOI” is essentially the amount of money you have left after subtracting all justifiable operating expenses from the total revenue generated from (or by) a property. This total revenue generated is called your “Gross Operating Income” or “GOI”. In short, in a case where Property Y has a GOI of $50,000 and justifiable or “reasonably necessary” expenses of $40,000, the NOI for Property Y would be $50,000 – $40,000 = $10,000.
Things to Note
- The GOI is calculated by subtracting vacancy and credit losses from the property’s gross potential income (i.e. how much it could make in the absence of its losses).
- Where the NOI is negative, the term “Net Operating Loss” or “NOL” is used.
- The sums that lead to the calculation of the NOI are captured on the property’s income statement as well as the cash flow statement.
The Difference between Cash Flow and NOI
A property’s cash flow is the amount the property generates and uses in a given period. While they may sound similar at first, the fundamental difference between the property’s cash flow and net operating income are the expenses that you must include in the cash flow but exclude from NOI figure. Loan payments are an example of this.
Calculating a Property’s NOI
The best part about calculating a property’s NOI is the ease with which it can be done. All you need is a calculator, a detailed list of the property’s income as well as its operating costs, and a clear understanding of what to include and exclude in order to arrive at an accurate the NOI.
To accurately calculate a property’s net operating income you must:
- Record all sources of income for the property i.e.:
– Rent or lease
– Parking space or other facilities rental
– Upkeep and other service fees charged to tenants
– Vending and/or laundry machines as well as any such related services
– Any other means of income generation on the property
- Document all expenses related to:
– Vacant spaces/rooms/lots etc.
– Utilities and maintenance (such as janitorial fees and repairs)
– Office personnel
– Property taxes and insurance
- Avoid taking the following into account:
– Loan payments (both principal and interest)
– Capital expenditures
– Taxes apart from those that are property related (since NOI is, in fact, a pre-tax figure).
Mistakes to Avoid
While net operating income calculations allow the flexibility of upward or downward adjustments of income and justifiable expenses, it is important to avoid overstating generated income or understating operating expenses. Doing either could easily prevent you from getting an accurate view of the property’s true profitability. This is especially critical to remember when attempting to show a possible buyer or investor what he or she can expect to make from the property.