What is net operating income?
By RJ Johnson June 21, 2023
Net operating income (NOI) is a financial metric utilized in real estate to assess the income generated from a property after considering all operating expenses, excluding debt service and income taxes. It is calculated by deducting operating expenses from the property’s gross operating income (GOI). Operating expenses encompass property management fees, property taxes, insurance, utilities, repairs and maintenance, as well as other necessary expenses for property upkeep.
In the realm of commercial grocery-anchored real estate, NOI holds significance as it determines the property’s value and potential return on investment. A higher NOI generally corresponds to a greater property value and increased potential return for investors.
When evaluating the financial performance of a grocery-anchored property, investors may derive the property’s cap rate by dividing the NOI by the property’s market value. A higher cap rate implies a greater potential return on investment, whereas a lower cap rate indicates a diminished potential return.
Additionally, investors can employ the NOI to calculate other financial metrics, including cash-on-cash return, internal rate of return (IRR), and equity multiple. These metrics aid in further assessing the property’s financial performance and potential profitability.
What is operating income vs net operating income?
In commercial real estate, both net operating income (NOI) and operating income play crucial roles as financial metrics for evaluating the financial performance of a commercial real estate investment property. However, their calculations and implications differ.
Operating income in commercial real estate pertains to the income derived from the property’s operations prior to subtracting operating expenses. It is determined by deducting operating expenses (such as property taxes, insurance, maintenance costs, property management fees, and utilities) from the property’s gross income. Operating income helps investors comprehend the income generated solely from the property’s operations, excluding any non-operational income or expenses.
On the other hand, net operating income or NOI is a more comprehensive measure that reflects the property’s profitability after accounting for all operating expenses. It is computed by subtracting all operating expenses, including property taxes, insurance, maintenance costs, property management fees, utilities, and other relevant expenses, from the property’s gross income. NOI provides a clearer understanding of the property’s ability to generate income through its operations and is frequently employed in investment analysis and valuation.
NOI Formula
Let’s consider a commercial property that generates an annual gross income of $300,000. The property has operating expenses, including property taxes, insurance, maintenance , and utilities, totaling $100,000 per year. The property has additional expenses totaling $25,000 for property management fees making the total operating expenses $125,000.
Operating income = Gross income – Operating expenses
Operating income = $300,000 – $100,000
Operating income = $200,000
Net operating income (NOI) = Gross income – Total operating expenses
NOI = $300,000 – $125,000
NOI = $175,000
Real estate investors often recognize the complexity of commercial real estate operating income and net operating income (NOI), which is why partnering with experienced real estate operators is crucial. Tri-Land Properties, a seasoned commercial real estate operator, specializes in grocery-anchored real estate developments and has been actively involved in this field since 1978. With over 40 years of experience, we have diligently assessed real estate risks and returns for investors.
By investing with Tri-Land Properties, accredited investors gain the opportunity to access institutional-grade grocery-anchored real estate investments. Our expertise and track record in the industry enable us to provide valuable insights and potential investment opportunities in this sector. To learn more about our offerings and discuss further, please reach out to RJ Johnson at Tri-Land Properties.