What is net operating income, and how is it determined?

Net operating income (NOI) is a key financial metric used in real estate to assess the profitability of an income-generating property. It is determined by taking the effective gross income, which is the total income generated by the property after accounting for any vacancy or credit losses, and subtracting the operating expenses associated with managing and maintaining the property.

Operating expenses include costs like property management fees, maintenance, utilities, property taxes, insurance, and any other expenses necessary for the day-to-day operation of the property. By focusing solely on the effective gross income and excluding personal or non-operational expenses, NOI provides a clear picture of the property's operational efficiency and profitability.

This measure is crucial for real estate investors and professionals because it helps assess the potential return on investment and can influence decisions related to property acquisition, management, and financing strategies. Understanding NOI is essential for evaluating whether a property is generating sufficient income to cover its expenses and to provide a clear insight into its financial performance.