Net Operating Income: A Guide to Boosting Property Value
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Net operating income (NOI) is the most commonly used analysis tool for real estate investments. The net operating income is the total operating income for a property minus the total operating expenses for a property.
The net operating income is useful because it shows a property’s ability to generate income without considering its capital structure. Since different owners will have different capital structures and financing costs, the NOI allows the property to stand alone before taking any of these owner-specific factors into account.
The net operating income is often referred to as “the line” because operating expenses are calculated “above the line” while capital expenditures and leasing costs are “below the line” items.
Net operating income (NOI) is the income generated by a property minus all expenses incurred from operations. The basic net operating income formula is as follows:
Net operating income is positive when effective gross income exceeds operating expenses, and negative when operating expenses exceed effective gross income. For the purposes of real estate analysis, NOI can either be based on historical financial statement data or instead based on forward-looking estimates for future years, known as a proforma.
Net operating income measures the ability of a property to produce an income stream from operations. Unlike the cash flow before tax (CFBT) figure calculated on a real estate proforma, the net operating income figure excludes any financing or tax costs incurred by the owner/investor. In other words, the net operating income is unique to the property, rather than the investor.
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Anna prides herself in knowing not only the properties that are available on the market but also the people that live and work in Charleston. Anna has a knack for quickly understanding her clients’ bottom-line needs and guiding them toward the home or investment property that will best suit them.