what noi tells real estate investors
noi looks at the total revenue versus the total operating expenses of a rental property revenue is income from rent parking or storage fees and on site vending machines or laundry services operating expenses include maintenance and repairs property taxes and insurance property management fees janitorial services and utilities capital expenditures such as costs for a new air conditioning system for the entire building are not included in noi net operating income is a valuation method real estate professionals use to determine the precise value of income producing properties noi is used to calculate the capitalization rate a measure of the profitability of an investment property to the total cost the cap rate is calculated by dividing the noi by the total cost of a property expressed as a percentage the capitalization rate helps investors compare the returns of different properties for financed properties noi is also used in the debt coverage ratio dcr which tells lenders and investors whether a property s income covers its operating expenses and debt payments noi is also used to calculate the net income multiplier cash return on investment and total return on investment noi is used to determine the capitalization rate of a property also known as the return on investment roi in real estate it divides noi by the purchase price calculating net operating incomenet operating income r r o e where r r real estate revenue o e operating expenses begin aligned text net operating income rr oe textbf where rr text real estate revenue oe text operating expenses end aligned net operating income rr oewhere rr real estate revenueoe operating expenses noi examplethe following information is an example of a rental condominium revenue total revenues 26 000operating expenses total operating expenses 10 000the net operating income noi is 26 000 10 000 16 000 profit and lossan owner who collects 120 000 in revenues and incurs 80 000 in operating expenses will have a resulting noi of 40 000 120 000 80 000 if the total is negative with higher costs than revenues the result is called a net operating loss nol creditors and commercial lenders rely heavily on noi to determine the income generation potential of a mortgaged property noi helps lenders forecast a property s cash flows if a property is profitable the lenders also use this figure to determine the amount they are willing to lend lenders may reject a mortgage application if a property shows a net operating loss property owners can manipulate operating expenses by deferring certain expenses while accelerating others noi can also be increased by raising rents and other fees while simultaneously decreasing operating costs if an apartment owner waives a tenant s yearly 12 000 rent in exchange for that renter acting as a property manager valued as a 30 000 cost the owner may subtract the cost from revenue 