Definition: Net Operating Income (NOI) is a term that refers to the result from subtracting total operating expenses from total income. It can also be defined as available income after operating expenses are deducted.
What Does Net Operating Income Mean?
What is the definition of net operating income? This concept is mostly used in the real estate industry to describe net income after deducting total operating expenses; in the case of real estate those expenses will be the cost of keeping things running, things like wages, electricity, water, among others.
This concept excludes items like interest expenses, taxes or any other non-operational financial items. On the other hand, for real estate business revenues will normally come from rent, events or in some cases even a percentage of the sales of some of the tenants.
Let’s look at an example.
Example
Metropolitan Realtors INC is a company that runs many high-end shopping malls in the city of Miami. The buildings are 80% owned by the company and they have many commercial spaces to rent. They are also in charge of keeping the malls up and running. The CEO of the company wants to know how profitable the company’s operations are, excluding financial expenses and any other expenses that, by nature, are attached to the company’s financial structure. The Chief Financial Officer needs to calculate the NOI of the company to be able to provide this information. How can he do that?
By reviewing the concept of NOI, which is total revenues from property owned minus total operating expenses, the CFO can provide all the information the CEO is requiring. In order to do that, he has to calculate all revenues generated by all the commercial space they are currently renting plus expenses paid to the company by third-party owners of the remaining space and then subtract total operating expenses that come from running the malls and keeping them in good shape for consumers.
Summary Definition
Define Net Operating Income: NOI is a financial metric often used in the real estate industry to show the profitability of a specific piece of property.
