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# Define Net Operating Income (NOI) in Real Estate

## Net Operating Income (NOI):

Net Operating Income (NOI) is a key financial measure in real estate, particularly for income-producing properties like rental buildings or commercial spaces. It represents the total income a property generates after accounting for all operating expenses, but before considering taxes, interest, depreciation, and amortization.

To calculate NOI, you subtract the property's operating expenses from its gross income. The operating expenses include costs like maintenance, repairs, property management fees, utilities, insurance, and other costs related to the day-to-day operation of the property. NOI does not take into account mortgage payments, as those are considered financing expenses.

NOI-formula.png

## Example:

An appraiser would use net operating income (NOI) in the process of valuing an income-producing property, such as a commercial building or an apartment complex.

"A Deep Dive for Real Estate Appraisers"

Let's say you own an apartment building with 10 units. Each unit rents for \$1,000 per month. Your total gross income for the year would be:

10 units x \$1,000 per unit x 12 months = \$120,000

Now, let's consider the operating expenses for the property:

Property management fees: \$10,000
Maintenance and repairs: \$15,000
Insurance: \$3,000
Utilities: \$7,000
Other miscellaneous expenses: \$5,000
Total operating expenses = \$40,000

To calculate the Net Operating Income:
NOI = Gross Income - Operating Expenses
NOI = \$120,000 - \$40,000
NOI = \$80,000

In this example, the Net Operating Income for the apartment building is \$80,000 per year. This figure helps you understand how profitable the property is from its operations, and it is commonly used by investors and appraisers to estimate the value of income-producing properties.

"Wit & Whimsy with the Dumb Ox: Unlocking Knowledge with Rhyme:"

In the land of Real Estate, where buildings tall and small,
There is a thing called NOI, a term known to all.

Net Operating Income, NOI for short,
A number to find, to measure the worth of a fort.

Let's take a building, with ten homes to rent,
A thousand per month, on each unit is spent.

A year full of rent, to do the math right,
Times ten units, times twelve months, what a sight!

One hundred and twenty thousand, the gross income we see,
But expenses we must subtract, as easy as one, two, three!

Ten thousand for management, fifteen thousand for repairs,
Three thousand insurance, and utilities that give us gray hairs.

Five thousand more, for expenses assorted,
The total we find, as we eagerly reported.

Forty thousand expenses, from gross income we take,
Eighty thousand NOI, our profit we make!

And that's how it's done, in the world of Real Estate,
NOI explained, with a rhyming twist, ain't it great?