Net Operating Income (NOI)
Definition
Net operating income (NOI) is the annual income generated by an income-producing property after deducting operating expenses, but before deducting mortgage payments, income taxes, and depreciation.
Example
An apartment complex has PGI of $500,000. Vacancy is 5% ($25,000), making EGI $475,000. Operating expenses total $175,000. NOI = $475,000 - $175,000 = $300,000. The owner's $200,000 annual mortgage payment is NOT included.
Exam Tip
The most important thing to remember is what is NOT included in operating expenses: mortgage payments (debt service), income taxes, depreciation, and capital expenditures. If a question lists expenses and includes mortgage payments, you must exclude them when calculating NOI.
Related Math Terms
Capitalization Rate (Cap Rate)
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
Property Value (based on Cap Rate)
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
Percentage to Decimal Conversion
Converting a percentage to a decimal involves dividing the percentage value by 100.
Monthly Interest Calculation
Monthly interest is the portion of the total annual interest that is paid or accrued each month.
Annual Interest Calculation
Annual interest is the total amount of interest charged on a loan or investment over a year.
Calculating Daily Rate
Daily rate calculation involves determining the cost or income per day by dividing the total amount by the number of days in the period (usually a year or a month). This is a fundamental step in proration.
Frequently Asked Questions
Test Your Math Knowledge
Practice with exam-style questions to make sure you can apply Net Operating Income (NOI) and other math concepts.