## Formula to Calculate Net Operating Income

Net Operating Income measures the company’s earnings after deducting the operating expenses but before deducting taxes and finance charges. It is predominantly used in real estate investments and is helpful in analyzing the profitability of the company. The formula for calculating net operating income is:

All the Revenue Before Tax & Finance Expenses – Operating Expenses

### Calculation of Net Operating Income

- The formula for calculating net operating income is quite similar to calculate earnings before interest, tax, and depreciation.
- The concepts are similar, and hence we shall first calculate the operating income where only income we shall exclude would be the one-time special income like profit earned on the sale of assets or investments.
- The next step would be to calculate operating expenses that are incurred to earn those operating income.
- Finance cost, depreciation, capital expenditure, etc. all are excluded from calculating operating expenses.
- When one takes a difference in operating income and operating expenses, that will be operating income before tax.

### Examples

#### Example #1

**De Venice owns a property in the town. He earns a rental income of $18,000 per month. But, he has to bear certain expenses to maintain the property which includes building maintenance expenses, property tax and sums to $5,000 a month. You are required to calculate the net operating income for the entire year.**

**Solution:**

Use below given data for the calculation of net operating income.

Calculation of net operating income can be done as follows:

We can use the above equation to calculate net operating income.

Net Operating Income = (18,000 * 12) – (5,000 * 12) = 216,000 – 60,000

Net Operating Income will be –

**Net Operating Income = 156,000**

Therefore, the Net Operating Income of the property for De Venice is $156,000.

#### Example #2

**Astha Incorporation a real estate firm who majorly invests in commercial properties and earns rental income and other income as well as per below table:**

**It also incurs below expenses which are provided in % of total operating income.**

**The manager of astha incorporation has asked the accountant to calculate the net operating income for the year ended.**

**You are required to estimate the net operating income based on the above data.**

**Solution:**

In this example, we are given revenue in subsection and we need to take a total of that to arrive at revenue from operations and then we can calculate the expenses which are the percentage of total operating income.

Total Revenue income will be:

Total Revenue income = 156000 + 6720 + 9360 + 14400 = 186480

Now, we will calculate the operating expenses which are % of total revenue which is 1,86,480.

Therefore, the Total Operating Expenses will be:

Total Operating Expenses = 18648 + 14918.40 + 27972 + 37296 = 98834.40

Calculation of net operating income can be done:

Now, we will use the above formula to calculate net operating income:

Net Operating Income = 1,86,480 – 98,834.40

Net Operating Income will be –

**Net Operating Income = 87,645.60**

Therefore, the NOI will be 87,645.60

#### Example #3

**SSG Incorporation a manufacturing firm has reported below figures in its annual filing of financial statements.**

**John who is newly hired as a credit analyst was assigned the task of calculating operating profit based on the above financial statement reported by the company.**

**You are required to calculate the net operating income.**

**Solution:**

We are given net profit here and to calculate net operating income either we can start with net profit and add back those expenses which do not form part of operating expenses or else the second option is to start with revenue and deduct only operating expenses.

We shall move forward with the second option:

Total income will be:

Total Income = 1056000 + 123899 = 1179899

We shall exclude the depreciation, interest and tax expenses to calculate total expenses.

Total Expenses = 528000 + 126720+116160 = 770880

We can do a calculation of net operating income as follows:

Net Operating Income = 11,79,899 – 7,70,880

Net Operating Income will be –

**Net Operating Income = 4,09,019**

Therefore, the NOI will be 4,09,019.00

### Relevance and Uses of Net Operating Income Formula

Net Operating Income is used for arriving at the capitalization rate, that aids in determining the property’s value and aids the investors of real estate to make a comparison of several properties which they might be considering selling or buying. For properties that are financed, net operating income can also be used in calculating the debt coverage ratio, which helps investors and lenders to know whether a firm’s income covers its debt payments and operating expenses. Net operating income is also used to calculate the total return on investment, cash return on investment and net income multiplier.

### Recommended Articles

This has been a guide to Net Operating Income Formula. Here we discuss how to calculate net operating income using its formula along with practical examples and downloadable excel template. You can learn more about financial analysis from the following articles –

- Gross Income Multiplier
- Use of Marginal Product Formula
- Examples of Operating Expense
- Pretax Income Calculation
- NOPAT Calculation
- Formula of Income from Operations