Net operating income is a measure of the profitability of a real estate investment. It is used to examine the underlying cash flows of an investment before the effects of taxes and financing costs are considered. A net operating income analysis is developed by prospective investors as part of their formulation of the value to place on a property.
The calculation of net operating income is to subtract all operating expenses from the revenues generated by a specific property. The formula is:
+ Revenue generated by real estate
– Operating expenses
= Net operating income
The revenues associated with real estate include the following:
- Facility rental
- Vending proceeds
- Laundry proceeds
- Parking fees
- Service charges
Operating expenses associated with real estate include the following:
- Janitorial expenses
- Property insurance
- Property management fees
- Property taxes
- Repairs and maintenance
Expenses not included in the operating expenses category include income taxes and interest expense.
The results of this analysis are subject to manipulation, since a property owner could elect to accelerate or defer certain expenditures, thereby altering the amount of net operating income.
Though this concept is most commonly applied to real estate, it can be used anywhere, usually under the alternative name of earnings before interest and taxes (EBIT).