Net Operating Income (NOI) is a key financial metric primarily used in real estate investing to evaluate the profitability of income-generating properties. It is calculated as the total revenue generated by the property (e.g., rental income and other income streams) minus all operating expenses (e.g., maintenance costs, property management fees, and utilities), excluding financing costs such as mortgage payments and non-operational costs like taxes. For example, if a property generates $150,000 in revenue annually and incurs $50,000 in operating expenses, the NOI would be $100,000.
NOI is significant for real estate investors as it provides a clear picture of the property's operational efficiency and serves as a basis for further financial analysis, such as determining the property's capitalization rate (Cap Rate), which is critical for assessing the investment's potential return. Additionally, lenders often consider NOI when assessing the property's ability to service debt. A high NOI indicates efficient management and strong income generation, while a low NOI may point to areas needing improvement, such as high expenses or low occupancy rates.
Using the term in practice: "The efficiency of income generation from this property has improved this quarter, as indicated by an increase in the Net Operating Income (NOI) compared to last quarter."