Net Operating Income is a measure of the business’s profitability from operations. It is the Income after deducting operating expenses but before deducting depreciation, amortization, interest and income taxes. It is also known as Earnings Before Interest and Taxes (EBIT).

As an example, let’s look at an apartment building with the following income and expense figures:

  • Gross Rental Income: $160,000
  • Laundry Income: $3,000
  • Management expense: $16,000
  • Utilities expense: $25,000
  • Maintenance expense: $35,000
  • Property Tax expense: $12,000
  • Insurance expense: $6,000
  • Depreciation expense: $45,000
  • Mortgage Interest expense: $60,000

The Net Operating Income would be $69,000 (160,000 +3,000 – 16,000 – 25,000 – 35,000 – 12,000 – 6,000)

Net Operating Income is part of the calculation of the cap rate which we covered last week. It is also used to calculate the debt service coverage ratio (DSCR) which we’ll cover next week.