What does "net operating income" (NOI) represent in real estate?

Net Operating Income (NOI) is a crucial concept in real estate, representing the total income generated from a property after accounting for operating expenses. This measure provides a clearer view of a property’s profitability, as it reflects the income available to cover financial obligations and generate cash flow.

To arrive at NOI, you start with the gross income from the property, which includes all rental income and any additional income sources. Then, you subtract all the operating expenses necessary to maintain the property, such as property management fees, maintenance costs, insurance, and utilities. Notably, NOI does not include financing costs or taxes; therefore, it focuses solely on the income and expenses associated with property management and operation.

This definition makes it an essential metric for real estate investors looking to assess the performance of a property, as it helps identify how much revenue the property generates relative to the costs of its operation. Understanding NOI allows investors to make informed decisions about purchasing, selling, or managing real estate assets.