Assume these two investors each owned a property that was exactly identical in all material respects – B’s income statement would have no “interest expense” (and therefore a higher NIBT) than investor A, whose income statement has a high interest expense (and therefore a lower NIBT). Real estate investor ‘A’ likes to employ maximum leverage, while real estate investor ‘B’ never uses debt at all (they pay cash for their properties).Is one management fee “correct”? (not necessarily). Were an institutional investor to purchase this property, they may charge a much smaller management fee. Because of this, they may take a very high management fee – which would overstate the property’s expenses (and understate its NIBT). An individual investor owns a commercial property and this person generates most of their retirement income from the property.The best way to think about NOI is that a number of add-backs and normalizations are required to understand the property’s potential return for an investor.Ĭonsider the following scenarios to help illustrate: NOI, like EBITDA, is often used as a proxy for operating cash flow when calculating debt service coverage ratios or when comparing properties to calculate estimated market values (since it ignores tax rates and capital structure decisions). NOI is a metric used to measure the operating profitability of a specific property. This also makes understanding each individual property’s profitability (or ability to generate cash flow) difficult to understand. Total Rental Income – Total Expenses = NIBTīecause passive income tax rates tend to be high in many jurisdictions, it’s a common strategy for real estate investors to try and actively inflate expenses in order to drive down their income tax bills.įurther, where an investor owns multiple properties, net income (or NIBT) may be calculated or presented at the portfolio level. For real estate, revenue is (largely) rental income: It’s the total revenue minus the total expenses. NIBT is an accounting figure, whether we’re talking about an operating business or an investment property. It’s critical to understand just how different these two figures can be, even for the exact same property.
NOI divided by the market capitalization rate equals an estimate of market value for an income-producing investment property.NOI is to commercial real estate what EBITDA is to corporate finance – a capital structure and tax-rate agnostic profitability measure.NOI is a standardized metric that serves as a proxy for cash flow and is used to compare different property types and assess their economic value.