Definition:

Net operating income (NOI) is a calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus operating expenses.

A property might generate revenue from a number of sources (rents, parking fees, and other services such as vending and laundry machines). Operating expenses are those required to run and maintain the building and its grounds (insurance, property management fees, utilities, property taxes, repairs, etc).

NOI is a before-tax figure that also excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.

Example:

Consider a real estate company is going to make an investment in a large mixed-use development which includes retail and event space. The property generates annual rental income of $1,000,000 from the retail space. Similar properties in the area have experienced vacancy and credit loss of 5% annually, which amounts to $50,000. Other income is generated by a parking garage that charges hourly, and event space that can be rented. These generate an annual income of $60,000. Major expenses include maintenance of the buildings, property taxes, and management costs, amounting to $150,000. This means that the Net Operating Income for the property is $405,000 (see below for calculation).

Calculation: (1,000,000 – 50,000 + 60,000 – 150,000) = $860,000