One of the most important calculations any real estate investor needs to know is Net Operating Income, or NOI. The NOI calculation measures your rental property’s profitability before adding in any costs from financing or taxes. Net operating income is also used when calculating other important metrics such as Cap Rate, Debt Service Coverage Ratio, or Return on Investment. Continue reading to learn how to calculate net operating income. For a quick and easy NOI calculation, simply enter in your property’s details in our NOI Calculator below.
Net Operating Income Calculator:
What is Net Operating Income in Real Estate?
In short, Net Operating Income is an important factor in determining the profitability of a potential real estate investment. Essentially, it calculates the revenue generated from a property after subtracting your Operating Expenses (e.g. maintenance, insurance, property taxes, utilities, etc). Therefore, a NOI calculator comes in handy for landlords who want to quickly know whether a real estate investment is worth looking into more.
NOI Definition
Many real estate investors are confused when it comes to the NOI meaning, often wondering “what does NOI stand for?”. Our partners at Doorloop provide a simple definition: “After deducting essential operational expenses, NOI evaluates the profits and revenues of an investment in a real estate property.”
Net Operating Income Calculation
The NOI calculation is simply:
Net Operating Income = Gross Operating Income – Operating Expenses
However, as many landlords know, these components entail several additional factors. In order to effectively calculate your property’s profitability, investors must keep detailed records and carefully track all income and expenses. This can be done using spreadsheets, though we believe that using property management software makes this task so much easier and more accurate. Our favorites include Doorloop, Landlord Studio, and Stessa. Popular online rent collection tools such as Avail and PayRent make it easy for landlords to track income as well.
Related Read: Reporting and Accounting Tools: Best Accounting Software for Landlords
What is NOI Used for?
Understanding the purpose of NOI is crucial for making informed investment decisions in real estate. NOI is a powerful metric as it reveals the actual profitability of a property by subtracting all operating expenses from the revenue generated. This calculation provides a clear picture of the property’s financial performance, excluding mortgage costs.
It’s essential to note that while NOI serves as a reliable indicator of a property’s operational efficiency, it does not include mortgage expenses in its computation. This omission ensures that the NOI focuses solely on the property’s ability to generate income, excluding financing-related factors.
By determining the NOI of a property, investors can make well-informed decisions about the profitability and viability of their real estate investment. It serves as a key metric for evaluating whether the return on investment justifies the initial purchase. However, it’s important to differentiate NOI from Net Cash Flow (NCF).
Net Cash Flow takes into account both the property’s cash inflows and outflows over a specified period. Unlike NOI, NCF considers mortgage payments in its calculation, providing a more comprehensive view of the property’s financial health. In essence, NCF helps investors understand the actual cash that flows in and out of their investment, taking financing obligations into consideration.
What Information Will I Need to Calculate NOI?
To determine NOI, first you will need to calculate all of the income a property generates (i.e. Gross Operating Income). You will also need to calculate the Operating Expenses you may incur, such as:
- Real Estate Taxes
- Insurance
- Utilities
- Repairs and Maintenance
- Property Management
- Other Expenses such as pest control, tenant screening fees, and vacancy costs
Then simply input your monthly rent and other income and any annual expenses into the above NOI calculator to find your net operating income.
Because mortgages vary between investments, your NOI calculation should not include your mortgage. By leaving these out of your calculations you can eliminate factors that differ from property to property, and obtain more accurate data for comparing potential rental investments on head-to-head basis.
How to Find Operating Income
Thankfully finding your operating income is fairly straightforward. Also called “gross income”, this number is simply the sum of all of your income from your rental property. Unlike expenses, these are fun numbers to track! Here are some common forms of operating income for rental property:
- Rents
- Laundry proceeds
- Pet rent
- Parking or storage space rent
NOTE: Refundable deposits are not considered operating income. They are not a payment made to you as other income is. They may not be spent and must be set aside in a trust account.
How to Calculate Net Operating Income
Once you’ve calculated your Gross Operating Income and Operating Costs, you will be able to subtract your running costs (i.e. Operating Expenses) from the yearly rental income earned (i.e. Gross Operating Income). Use our simple NOI calculator above, or do your own NOI calculation using the following formula:
Gross Operating Income – Operating Expenses = Net Operating Income
Calculating Net Operating Income – An Example
Let’s assume Derek recently purchased a duplex earning $3000 per month in total rent. He also charges parking fees to his tenants totaling $100 per month. There are shared coin-operated laundry machines on the property as well that earn approximately $50 per month on average. Using our NOI calculator, Derek would input $2000 for monthly rent, and $150 for other monthly revenue.
Gross Operating Income = $37,800
Now, let’s assume Derek has annual operating expenses which in plugs into his net operating income calculator as follows:
- Property Taxes: $5,000
- Insurance: $900
- Utilities: $2,200
- Repairs and Maintenance: $2,000
- Property Management: $3,000
Operating Expenses = $13,100
According to the net operating income formula above:
Net Operating Income = $37,800 – $13,100 = $24,700.
Suppose Derek paid $600,000 for this property. By extension, the Cap Rate would be $24,700/$600,000 = 4.1%. The Gross Rent Multiplier (GRM) is 15.9.
Net Operating Income Calculator: Takeaway
Net Operating Income (NOI) is a popular metric used by real estate investors to determine the profitability of a property. NOI is calculated by subtracting all operating expenses from the total revenue generated by the property. The greater the revenues and the smaller the expenses, the higher the NOI and more profitable it is. You can also use our NOI Calculator to see if making value-add improvements, such as adding video intercoms, apartment security systems, or other capital projects, helps maximize your property’s net operating income and profitability.
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