NOI - Net Operating Income

One of the most important numbers in commercial real estate is Net Operating Income. This is something you need as an investor or user of commercial real estate. NOI tells you everything regarding the investment . It is what the property will produce when all expenses have been deducted from Gross Operating Income. This is an important number in all steps of the ownership process. 

When you buy a property, you want to know the NOI. What is the property producing after all expenses. It is one way to actually value a property. If you put your money in savings and the bank offers 2% interest. You know for a fact that when you take it out, you will have your original deposit and an additional 2% annually in interest. The same for an investment in Real Estate. You want to know the what this property is producing in income from the tenants, and what the costs are that must be spent to earn that income. The difference is NOI.

A real estate investment is different than buying a CD. RE is not as liquid, and you can lose some or all of your investment. For that reason, we require a higher return, for the risk we are taking. You calculate that higher return as NOI.

Think of NOI as what's left for you at the end of the period. It is the return on your investment. The simplest way, is to look at what's left in your bank account, for this property the first year you own it. This is your profit on a cash basis.

Sample: Gross Rents( less credit or collection costs plus vending income) equals Gross Operating Income (GOI) less operating expenses OE: (Taxes, maintenance, insurance, repairs, utilities and management fees) equals NOI. GOI $56,000 - OE $34,000 = NOI $22,000

Now crunch that number and it will tell you what this investment will pay. NOI divided by Investment equals = IRR Investment Rate of Return. NOI $22,000 / Investment $275,000 = IRR 8%. We will talk more on IRR later, but remember, we need to know NOI if we are buying Real Estate as an investment.