What is NOI?
The net operating income measures the ability of a real estate investment to generate cash flow from its operations, according to ValuePenguin. This profitability measure is calculated by subtracting the operating expenses from the gross operating income.
The NOI is calculated before tax and interest on loans. Sometimes other industries call the NOI the earnings before interest and taxes or EBIT for short.
How to calculate the net operating income?
To calculate the NOI, you must know the gross operating income and the operating expenses. The gross operating income includes but not limited to the income generated from rents and fees. On the other hand, the operating expense includes but not limited to wages, salaries, property taxes, maintenance, and other repairs, etc.
Why does the net operating income matters?
The net operating income tells investors how well their investment properties are doing. By using NOI, it is easy to know if the property is profitable or not. Also, investors can be able to elaborate on all sources of income and where the money is being spent.
If NOI is negative, it will mean that the real estate investment is losing money. From there, investors can evaluate all expenses and see if they are spending more money on some expenses than they are supposed to. When NOI continues to be negative, investors restructure their business models in an attempt to generate positive cash flow.
On the other hand, if NOI is positive, it means the company is on a good path to profitability. This is a good sign for may real estate investors.
