What does "net operating income (NOI)" represent?

Net Operating Income (NOI) is a key financial metric used in real estate to evaluate the profitability of an income-producing property. It represents the income generated from the property after all operating expenses have been deducted, but before deducting costs such as financing (e.g., mortgage payments) and taxes.

When calculating NOI, one starts with the total revenue generated by the property, which includes rents collected and other income, and then subtracts the operating expenses, such as property management fees, maintenance costs, property insurance, and property taxes. The resulting figure gives a clear indication of how effective the property is at generating income after accounting for the costs associated with its operation.

This metric is crucial for investors and property managers as it helps them assess the investment's performance and make informed decisions about buying, selling, or holding a property. NOI is essential for calculating various financial ratios and for understanding cash flow, making it a pivotal concept in commercial real estate operations.