Calculating Net Operating Income (NOI) with Examples

What makes something profitable? Raw revenue figures can be misleading, and net profit often includes variables that don’t directly reflect an asset’s true earning power. This is where Net Operating Income (NOI) comes in: it’s a financial metric that measures your organization’s financial health by helping you determine an asset's profitability, valuation, and investment viability.

With the rise of revenue management software, tracking and optimizing NOI has become more precise than ever. These tools help investors and property managers analyze market trends, adjust pricing strategies, and control operational costs — all of which directly impact NOI. Read on to learn more about NOI, how it’s calculated, and why it matters for your business.

Net operating income (NOI) measures the profitability of an investment or business operation, particularly in the real estate industry. At its core, NOI represents the income generated from your property or business after deducting operating expenses but before accounting for taxes, financing costs, and non-operational items. It differs from operating income that shows your income with only the operating expenses removed, not taxes and other expenses like the NOI.

Think of NOI as a measure of operational performance. It highlights how much money is left after paying for essential expenses, such as property maintenance, utilities, and employee wages, but before considering broader financial factors like interest payments or depreciation. This focus makes it especially useful for investors and business owners to assess the health and efficiency of an operation. In particular, investors often look at the NOI to compare performance across similar businesses or investments by evaluating which business’s metric looks more profitable.

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Net operating income (NOI) and EBITDA (earnings before interest, taxes, depreciation, and amortization) are both measure profitability but serve different purposes. Net operating income (NOI) is primarily about the performance of a property or business’s core operations (like production and sales), excluding any influence from financing, taxes, or non-operational costs, and is a measure of operational efficiency.

EBITDA, on the other hand, is a broader metric that evaluates a company’s overall earnings before accounting for interest, taxes, depreciation, and amortization. Unlike NOI, EBITDA includes revenue and expenses beyond core operations, making it more suitable for assessing a company's ability to generate cash flow. For instance, EBITDA considers the cost of intangible asset amortization or interest on loans, which are ignored in NOI calculations.

Net Operating Income (NOI) and Net Income are both measures of profitability, but they capture financial performance from different perspectives.

Net Operating Income (NOI) focuses exclusively on the profitability of core operations and is calculated by subtracting a property's operating expenses from its total income. Net income, on the other hand, represents the “bottom line” of your company’s financial performance. It accounts for all revenue recognition and expenses, including operating costs, financing expenses, taxes, and non-operational items like one-time gains or losses. It’s calculated by subtracting expenses, interest, and taxes from total revenues. Net income provides a comprehensive view of a company’s total profitability after all obligations have been met.

Gross operating income (GOI) represents the total revenue generated from operations before any operating expenses are deducted. For example, in real estate, GOI would include all rental income plus any additional income streams, such as parking fees or laundry services, without factoring in costs like maintenance, utilities, or property management.

Net operating income (NOI), in contrast, takes GOI a step further by deducting operating expenses. NOI provides a clearer picture of actual profitability by accounting for the expenses necessary to keep the operation running. While GOI is a useful assessment, NOI is a more comprehensive measure for evaluating financial efficiency and decision-making. The NOI accounts for operating expenses and provides a clearer picture of an asset's true profitability than the GOI.

Calculating net operating income (NOI) focuses operating income and expenses and can give you a clear picture of your business. In the next section, we’ll walk through a practical example to illustrate how to calculate NOI and apply it in decision-making.

The formula for calculating net operating income (NOI) is simple and widely used across industries. Here’s the formula:

Net Operating Income (NOI) = Total Operating Income – Total Operating Expenses

• Total operating income: This represents all revenue generated from the core operations of the business or property. For example, it may include sales revenue or service fees directly tied to operations.
• Total operating expenses: These are the costs directly associated with running and maintaining the operations. Examples of this expense include salaries for operational staff or property insurance fees. It doesn’t include mortgages or taxes.

Let’s explore how net operating income (NOI) is calculated. Imagine you run a coffee shop that generates revenue from product sales and incurs regular operating expenses.

Step 1: Determine total operating income

The coffee shop’s monthly revenue includes:

• Sales of coffee and beverages: $20,000
• Sales of pastries and snacks: $5,000
• Merchandise sales (mugs, t-shirts, etc.): $2,000
• Total operating income = $20,000 + $5,000 + $2,000 = $27,000 per month

Step 2: Calculate total operating expenses

The coffee shop also incurs regular operating costs, such as:

• Staff wages: $8,000
• Cost of goods sold (ingredients and supplies): $7,000
• Utilities (electricity, water, and internet): $1,500
• Marketing and advertising: $1,000
• Maintenance and repairs: $500
• Total operating expenses = $8,000 + $7,000 + $1,500 + $1,000 + $500 = $18,000 per month

Step 3: Apply the NOI formula

Now, subtract the total operating expenses from the total operating income:

• NOI = Total Operating Income – Total Operating Expenses
• NOI = $27,000 – $18,000 = $9,000 per month

Step 4: Interpret the result

The net operating income for the coffee shop is $9,000 per month. This figure reflects your shop’s operational profitability before accounting for any non-operating expenses, such as loan interest or taxes. In this example, the NOI indicates that the coffee shop generates sufficient income to cover its operating expenses and still achieve a profit from its core operations. If the NOI were lower or negative, it could signal inefficiencies or excessive costs that need to be addressed, such as high staffing expenses.

Net operating income (NOI) can be affected by some business and environment factors. Below are some of the most common.

1. Operating revenue: Income generated from the core revenue operations of a business, such as rental income or sales revenue in other industries. Higher revenue increases NOI while a decline in revenue reduces it. Improving operating metrics can improve your NOI.
2. Operating expenses: Costs required to maintain and run the operations, such as maintenance, utilities, and staff wages. Increased expenses reduce NOI, while lower expenses improve it. Conduct regular expense audits to identify and eliminate unnecessary costs.
3. Occupancy rates (if applicable): The percentage of available rental units or spaces that are occupied. Higher occupancy rates increase operating revenue, while lower rates reduce it.
4. Maintenance and repairs: Costs associated with maintaining and repairing a property or business assets. Significant repair costs can reduce NOI, particularly if unplanned. Implement a preventive maintenance plan to minimize costly repairs and avoid unexpected financial strain.
5. Utilities: Expenses for essential services like electricity, water, heating, and waste disposal. Fluctuating utility costs can directly affect NOI. Invest in energy-efficient systems and practices to lower utility consumption.
6. Administrative costs: Overhead expenses for managing the business, such as office supplies, software, and administrative staff salaries. Higher administrative costs reduce NOI, so consider outsourcing non-essential tasks to reduce overhead or implementing more automation.
7. Property management fees (if applicable): Fees paid to property managers for handling day-to-day operations and tenant relations. Higher management fees decrease NOI.
8. Other operating income or expenses: Additional income or costs from operations, such as parking fees, vending machine income, or legal fees. Additional income increases NOI, while additional expenses decrease it. Identify opportunities to generate additional income, such as offering premium services.
9. Economic conditions: External economic factors, such as inflation, interest rates, or local market conditions. Economic downturns can reduce revenue or increase costs, negatively impacting NOI.

Your NOI is a balancing act between your business expenses and your revenue. By focusing on key areas of operations, you can help boost this key metric. Below are five ways to get started managing your NOI.

Managing expenses can help you improve your NOI without compromising the quality of products or services. Excessive or unnecessary costs can erode your profitability as well. To start improving your operating expenses, here are a few tips:

• Conduct regular financial audits of your income statements, balance sheets, and cash flow statements to identify wasteful spending you could quickly eliminate
• Negotiate contracts with vendors and service providers for better rates if possible
• Invest in energy-efficient systems that will save you money over time
• Implement sales automation tools to reduce recurring expenses
• Prioritize preventive maintenance to avoid costly, unexpected repairs where you could end up with a large — but ultimately preventable — bill

Increasing income is as important as controlling costs when it comes to boosting NOI. This involves improving both your existing revenue channels and finding new ones. These are some of the ways to maximize your revenue:

• Adjust pricing strategies to reflect market demand and value
• Diversify revenue sources, such as offering premium services, subscription models, or ancillary income like parking or additional fees to try and gather as much recurring revenue as possible
• Improve customer retention (if applicable) through exceptional customer service and maintaining high-quality facilities
• Explore innovative marketing strategies to attract new customers

Proactively forecasting market trends, income, and expenses helps your business anticipate challenges and seize opportunities when they arise. Here are a few ways to make the most of forecasting to improve your NOI:

• Monitor local and industry-specific economic conditions, such as property values or customer demand
• Use historical data to predict seasonal fluctuations in revenue or expenses
• Create flexible budgets to accommodate unexpected changes in costs or income
• Regularly update forecasts based on real-time data to remain flexible

Consistent tracking and analysis of NOI metrics helps your business to adapt to changes in operations or the market. It’s a straightforward way to gauge how effectively your business or property is being managed day-to-day. Consider trying to:

• Schedule regular financial reviews to evaluate income and expense trends
• Compare actual NOI with projected figures to identify discrepancies
• Benchmark performance against similar businesses or assets in the industry
• Use sales key performance indicators (KPIs) to measure progress and set actionable goals.
• Hold frequent performance reviews to provide the insights needed to address inefficiencies and capitalize on strengths

Advanced tools and software can simplify NOI management. Below are a few to try:

• Try platforms like Salesforce Sales Cloud to track revenue and expenses, manage operations, and gain actionable insights — and have access to AI sales agents that can help you simplify and become more efficient
• Implement property management or sales software for real-time monitoring of NOI-related metrics
• Use sales analytics software to visualize trends, forecast performance, and identify growth opportunities.
• Improve your sales times with CPQ solutions (configure, price, and quote), such as Salesforce to help you quote quickly and accurately from anywhere to boost your income.
• Automate routine tasks with AI for sales, including billing, invoicing, or maintenance scheduling to reduce manual effort and errors