Gross Operating Income: Definitions are like artichokes. Let’s take these two new terms one at a time: We have now succeeded in confounding our readers and compounding their problem by replacing one undefined term with two.
By more formal definition, it is a property’s Gross Operating Income less the sum of all operating expenses. You might think of NOI as the number of dollars a property returns in a given year if the property were to be purchased for all cash and before consideration of income taxes or capital recovery. With regard to investment real estate, however, the term, “Net Operating Income” is a minor variation on this theme and has a very specific meaning. NOI, as it is often called, is a concept that is critical to the understanding of investment real estate, so we are going to backtrack a bit and review that subject here.Įveryone in business or finance has encountered the term, “net income” and understands its general meaning, i.e., what is left over after expenses are deducted from revenue. We may have gotten a bit ahead of ourselves, since some of our readers were unclear on the precise meaning of Net Operating Income. Our discussion concerned the relationship among three variables: Capitalization Rate, Present Value and Net Operating Income. In a recent article, we discussed the use of capitalization rates to estimate the value of a piece of income-producing real estate.
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