Net Operating Income (NOI) is the actual or expected net income after operating expenses are deducted from effective gross income. A property's NOI is derived from its operating statement. When calculating NOI, mortgage and depreciation expenses are not included in operating expenses. NOI can be calculated before or after deducting replacements reserves, however, most lenders will include replacement reserves as part of their operating expense calculation.
To calculate your net operating income, see our NOI Calculator.
The formula for net operating income (NOI) is:
NET OPERATING INCOME (NOI) = EFFECTIVE GROSS INCOME (EGI) - OPERATING EXPENSES
Effective Gross Income (EGI) is the total rental and other income minus vacancy and collections losses.
Operating Expenses is the total of recurring expenses and replacement reserves but does not include mortgage or depreciation expense.
Why is NOI Important?
NOI is important because it conveys a property's net income after operating expenses. It is the primary metric of a property's profitability with respect to income from operations. In the income approach to real estate valuation, the NOI and a CAP rate are used to calculate a property's market value. NOI is also used to calculate the debt service coverage ratio (DSCR) that lenders use to determine loan rates, loan terms and maximum loan amounts.
Calculating Multifamily NOI
Multifamily NOI is calculated from the information on a property's operating statement, which represents the various income and expenses over a specific time period. For multifamily properties, income is primarily rental income, but can also include recurring items like; laundry, parking, storage and RUBS. Effective gross income is the total of these recurring income items minus collections losses and vacancy. Operating expenses includes items like management fees, utilities, insurance, repairs & maintenance, real estate taxes, landscaping, janitorial, trash removal, advertising, supplies, pest control, security and miscellaneous expenses. Mortgage payments and depreciation are excluded from operating expenses. Operating expenses can be calculated with or without replacements reserves, however, most lenders will include replacement reserves as part of their operating expense calculation. Categories of income and expenses can vary by property.
Common Multifamily NOI Errors:
Including "capital expenditures" in operating expenses. Capital expenditures are non-recurring expenses that improve the property, like a roof replacement, heavy unit turns, equipment or major repairs. These expenditures should be capitalized and depreciated but NOT expensed. Please consult with your tax professional for guidance on operating expenses and depreciable capital expenditures. If you have capital expenditures or non-related expenses on your operating statement, when applying for a loan, be sure to let your lender know so they can remove those expenses to accurately calculate your net operating income.
Including "non-related expenses" in operating expenses. Non-related expenses are expenses that are not related to the property. Examples of these include personal expenses or expenses for unrelated properties or businesses. These should not be included in a property's operating expenses.