Your Net Operating Income (NOI) is not your Return On Investment (ROI). It's an important tool for finding a value of an income generating asset.

All assets will have some sort of expense associated with the property; from taxes to the landscaper and hydro.

For this example, we are going to review a 20 unit apartment building in depth.

Firstly, you need to find the total annual income for the property including other sources of income such as laundry facilities, parking, storage, lockers, etc.

As you can see in the image/graphic above; we have calculated the Gross Monthly Rental income from the residential units as well as other income (laundry) to arrive at a total GROSS Monthly and Annual income.
Now that we know the detailed operating expenses for the previous 12 months; we can calculate the Net Operating Income (NOI) of a property.

To do this you subtract the Annual Operating Expenses from the Gross Annual Income.

Most of you who are reading this may already know what a Cap Rate (Capitalisation Rate) is already but surprisingly many don't know exactly what it is or how to calculate it.

It is actually quite easy to calculate and will help you determine quickly if a property makes sense.

Your Cap Rate will show you, if you had no mortgage - exactly how long it would take for your net income to pay for the property at it's purchase price.

Example;
You purchased a property for $1,000,000
Gross Income: $200,000
Operating Expenses are; $100,000
The Net Operating Income is $100,000

If you divide the Net Operating Income by the purchase price; you will see this property has a 10% Cap Rate ($100,000 / $1,000,000 = 10). It would take you 10 years to recapture your purchase price of $1,000,000 from the net income you generate after all expenses.

If the property only generated $50,000 per year; the Cap Rate would be 5% and take 20 years to recapture the purchase price.

Keep in mind; the Net Operating Income does not include debt servicing (your mortgage).