Net Operating Income (NOI) Explained

Author Lisa Stern Read bio
Tags: net operating income
Date: February 23, 2022

What is the actual difference? Revenues, operating income, net income, net operating income, total assets, total equity…


Revenue is the total amount of money that a company takes in over a specific period of time.

Operating income is the amount of operating revenue left after you subtract all operating expenses not including interest or taxes.

Net income is all revenue minus all expenses including tax.

Total assets is the sum of everything that a company owns or controls that has or produces value.

Total equity is all of the assets that the company has residual ownership of or claim over. Total equity is the total assets minus the total liabilities (assets that other people or entities have a residual claim to.)

But there’s a bit more to it…

Net Income Vs. Net Operating Income Approach

What are operating income and net income? How do they differ?

The net income approach is also known as the traditional approach. This is an approach in which both costs of debt and equity are independent of capital structure.

Operating income is the income a business derives from its operations. It is typically the revenue minus costs of goods sold, wages, other expenses that are needed to operate or run the business. Most companies also refer to operating income as EBIT (earnings before interest and taxes)

A business may also have nonoperating income and expenses. For example investment income, is the income from sales of businesses/subsidiaries, financing expenses and taxes. After these are taken into account, the final number is the net income. This is the “bottom line” income of the company.

Operating income is used to assess the health of the operating side of the business – what the company does on an ongoing basis. Sort of like its core business.

The net income takes into account other expenses not related to running the core business (interest, taxes, financing costs) or income that may be one-off items (like selling a factory/building that a company no longer uses). This gives the final “profit” of the company for that period.

Capitalization Rates and NOI

Usually1 real state performs in terms of how much of its cost is returned as an operating income. One of the ways to find out the value of an asset is by comparing how much income it actually brings in every year with how much the asset cost you to buy. This is the capitalization rate, shown in a formula:

Annual earnings / Asset cost

Capitalization rate is a number that quickly tells you how much per income dollar your asset is costing you. Thus, a low cap rate means you are getting more value from the asset

For real estate, a cap rate is an income approach to value. In a 10% cap rate market investors are paying $10 per dollar of possible NOI. In a 5% cap rate market investors are paying $20 for that exact same dollar of NOI. It is a valuation metric not a return.

A cap rate is simply the earnings divided by the cost of the asset

If you buy a building for £1m and get 100k a year, it’s 100,000 / 1,000,000 = 10%

If you want it in time, just divide 1 by the answer

Eg 1 / 0.1 = 10 years

Numbers on a keyboard

Net Operating Income (NOI) Formula

I understand how tax deductions can decrease your taxable income with noncash item tax shields. But how can a negative taxable income increase your net amount of cash? 

For example lets assume NOI=$0, depreciation= $1,000,000, and t=28%. How can it be possible that just because an item depreciated, that you can still have a positive after-tax cash flow of $280,000 with 0 net income?

Depreciation Isn’t a Cash Expense

Depreciation is accrual to cover the cost of buying some large piece of equipment in the past. The cash was paid when you purchased the equipment (or when the debt is due), but the expense is incurred as the item is used or a similar method (like time passed since the purchase).

So the company with NOI of $0 and depreciation still has $1,000,000 in cash flow (absent all the other items that cause income and cash flow to differ).

How do you calculate net operating income?

To calculate net operating income, subtract operating expenses from the revenue generated by a property. Revenue from real estate includes rental income, parking fees, service changes, vending machines, laundry machines, and so on. Operating expenses include all of the costs associated with operating the property.