Net operating income (NOI) measures the core profitability of real estate properties. It’s calculated as:
NOI = revenue generated from property – operating expenses
NOI is before any cost of financing (such as debt or mortgage interest expense) as well as income taxes. It focuses only on the core revenues and expenses directly related to operating the property.
The revenue generated from the property represents the rental revenue the property generates, including parking fees, laundry income, etc. It is also known as gross operating income, and can be calculated as:
Gross operating income = gross potential income – vacancy and credit losses
Gross potential income refers to the rental revenue that could be potentially generated if the property was rented out every day of the year and all tenants paid the rent due. To get to the actual rental revenue (gross potential income), we need to subtract vacancy and credit losses.
Operating expenses include any expenses needed to operate the property. These include property management fees, utilities, maintenance and repairs, property taxes, and insurance.