Glossary
Net operating income (NOI)
Also called: NOI, net income
Net operating income is a property's income after deducting the operating costs the owner bears, such as unrecovered outgoings, management and repairs, but before interest, tax and depreciation. It is the starting point for income-based lending tests.
An example
An owner of a small office building adds up the rent from each tenant, then subtracts the outgoings the leases do not pass on to tenants and the cost of managing the building. The result is net operating income.
Why it matters
Lenders use net operating income to work out interest cover and debt service cover, and valuers use it to value income-producing property. Overstating income or leaving out costs gives a misleading picture, so lenders will check it against leases and statements.
Points to check
Ask the lender which outgoings it deducts and whether it allows for vacancy, management and capital expenditure. Lenders may use a more conservative figure than the one in a sales campaign. Check lease terms to see which costs tenants reimburse. Use the same definition of income across properties when comparing them, and test how a vacancy or rent review would change the figure.
Try it: Interest cover calculator