What is NOI Margin?
The NOI Margin is a profitability ratio that compares a real estate property’s net operating income (NOI) to its revenue, expressed as a percentage.
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How to Calculate NOI Margin?
The NOI margin measures the profitability of a property investment by comparing its net operating income (NOI) to the total revenue it generates over a specific time period.
The net operating income, or “NOI”, is a fundamental metric used in the real estate sector to determine the potential profitability of property investments.
Like EBITDA, net operating income (NOI) is frequently used in practice because the metric is unaffected by discretionary financing decisions or differences in tax policies based on the jurisdiction.
Since net operating income (NOI) is calculated before financing costs, interest and income taxes paid to the government, the NOI metric is an unlevered measure of operating profitability.
By standardizing the net operating income (NOI) metric – i.e. dividing NOI by total revenue – the implied NOI margin can be utilized for purposes related to comparability, wherein a property’s NOI margin can be analyzed side-by-side relative to comparable properties.
Learn More → Net Operating Income (NOI)
NOI Margin Formula
The formula to calculate the NOI margin divides a property’s net operating income (NOI) by its total revenue.
Where:
- Net Operating Income (NOI) → The net operating income (NOI) starts with the property’s total potential income, namely rental income, followed by adjustments for other side sources of ancillary income, as well as deductions for vacancy and credit losses. From there, the direct operating expenses incurred as part of managing a particular property (or portfolio of properties) must be subtracted, such as payroll, general & administrative costs, maintenance costs, utilities, property taxes and property insurance.
- Rental and Other Property Revenue → The total revenue amounts to the sum of the property’s rental income and other sources of revenue, including adjustments for reimbursements.
The net operating income (NOI) metric measures the profits generated by a property after adjusting for vacancy and credit losses and deducting the incurred direct operating expenses.
- Effective Gross Income (EGI) → The effective gross income (EGI) represents a property’s potential gross income (PGI), net of any adjustments related to vacancy and credit losses (i.e. collection issues).
- Vacancy and Credit Losses → The incurred vacancy and credit losses represent the rental income NOT collected from tenants, which is often caused by tenants refusing to fulfill their payment obligations per their lease agreements, either by choice or from unexpected financial difficulties in which the mandatory payment obligations cannot be met on time.
From the effective gross income (EGI) metric, any direct operating expenses are subtracted to determine the annual net operating income (NOI).
Common Property Operating Expenses
- Property Management Fees
- Property Taxes
- Property Insurance
- Repairs and Maintenance
- Utilities
Note: The operating expenses deducted are contingent on the context of the analysis. For instance, estimating the pro forma property-level NOI on a per-segment basis requires a more granular calculation to identify the direct operating expenses and apply the right adjustments.
