What is NOI Yield?
The NOI Yield is the net operating income (NOI) of a property divided by the purchase price of said property, expressed as a percentage.
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How to Calculate NOI Yield
The NOI yield measures the annual profitability of a property investment relative to its initial purchase price.
The net operating income (NOI) of a property is the effective gross income (EGI) of a property, net of any direct operating expenses.
- Effective Gross Income (EGI) = Potential Gross Income (PGI) – Vacancy and Credit Losses
- Net Operating Income (NOI) = Effective Gross Income (EGI) – Direct Operating Expenses
Conversely, the formula to compute the net operating income (NOI) can be expressed as the following.
- Net Operating Income (NOI) = (Rental Income + Ancillary Income) – Direct Operating Expenses
The NOI yield represents the annual rate of return received by a real estate investor based on the income generated by the property and the purchase price paid to acquire the property.
Unlike the cap rate, which is usually computed as the NOI divided by the market value of the property, the NOI yield is the annual NOI divided by the total purchase price.
The purchase price includes not only the cost of acquiring the property, but also any other transaction-related expenses like consulting fees, appraisal fees, etc.
NOI Yield Formula
The formula to calculate the NOI yield is as follows.
Where:
- Net Operating Income (NOI) → Total Income (Rental Income + Ancillary Income) Less Direct Operating Expenses
- Property Purchase Price → Original Cost of Purchasing Property
Since the numerator is NOI, an unlevered metric – rather than cash flow after debt service (CFADS) – the output reflects the “unlevered” yield on property investments.
