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What is Net Operating Income in Real Estate?

Jerry Norton

Jun 6, 2024

white and red wooden house miniature on brown table

Real estate investing can be complex enough, especially for beginners, and that’s without the confusing terminology. Terms like gross rent multiplier, loan to value ratio, cash on cash return, and more can make it seem overwhelming.

That's why it's important to pace yourself: you can learn all there is to know about real estate investing over time.

What if I told you that one of these confusing terms can help you determine the profitability of a property?

Would you be more inclined to learn more about it?

I’m talking about net operating income. It's a powerful formula for both new and experienced investors that can take the guesswork out of real estate investing. 

If you’re ready to learn how net operating income can help you determine the profitability of a property, let’s get started! 

What is Net Operating Income? 

Net operating income is a real estate formula that determines the profitability of a property by subtracting total operating expenses from the property's gross income. 

Operating expenses typically include

  • property taxes 
  • insurance
  • maintenance costs
  • utilities
  • property management fees 
  • and more

By excluding debt-related expenses and non-operating costs, NOI focuses solely on the property's ability to generate income.

This is why net operating income is such a powerful formula for real estate investors. It serves as a key indicator of whether or not a property will be profitable, giving you as an investor a more clear picture before signing on the dotted line. 

That's right: while there's no crystal ball in real estate investing, NOI can help you get an idea of the future profitability of the property.

How to Calculate Net Operating Income

The calculation of NOI is relatively straightforward. Once revenue and expenses have been identified, subtracting the total operating expenses from the gross income is the net operating income. The formula for calculating NOI is:

NOI = Gross Income - Operating Expenses

So, what is a good NOI?

It depends, based upon your local area. What a good NOI is in Los Angeles will be vastly different than one in Kansas City.

To find the best NOI, find out the average NOI for comparable properties in your area and simply do better than that figure.

Strategies to Increase Net Operating Income

There are several ways to enhance your net operating income. This includes;

Boosting Rental Income

Increasing rental income can directly impact NOI, whether that's renovating the unit itself or doing a study to see if what you ask for rent is too currently too low.

Reducing Operating Expenses

Another way to improve NOI is to reduce your operating expenses. Are there things you're paying for with the property that you don't need? Maybe it's a property management service, a lawn service, or even putting a limit on water usage.

The Bottom Line: Net Operating Income

There you have it: there's no crystal ball with real estate investing, but there is the net operating income formula.

Use it on your first or next real estate deal to ensure that the property you're interested in will be profitable now and in the future. Plus, use the strategies listed in this article to improve your NOI so that you can increase your rental profit margins.