Net operating income

Rent or trading income after every cost of running the asset except financing - management, maintenance, insurance, tax and an allowance for periods standing empty.

Example

Gross rent of 72,000 less 24,000 of running costs gives net operating income of 48,000.

Important

Capitalising gross rent instead of this figure overstated one property's value by 50%, with arithmetic that was entirely correct. The cost list beneath the number is where the method is won or lost.

Related terms

• Capitalisation rate — The required annual return used to convert an income stream into a price, most commonly in property. Value is net operating income divided by the rate.
• Operating margin — Operating profit as a percentage of revenue - what is left after the costs of running the business but before interest and tax. It asks whether the business around the product makes money.
• Free cash flow — Operating cash flow less capital expenditure - what is left after the business has funded both its trading and the assets it needs to keep running.

Lessons that explain it

• Gross yield is not a yield — Rent divided by price is the number every listing quotes and no owner receives. Take the five deductions out and Property P's 8.00% becomes 4.264% - and the two halves of the return turn out to be far less connected than they sound. (12 min)
• No closing bell: comparables, appraisal and the cap rate — Nothing quotes this asset. Its price comes from three negotiated sales that happened months ago, adjusted by somebody's judgement - and from an income lens that is more honest and much less popular. (11 min)
• Appraising one property: the numbers, the condition, the tenant and the exit — Seven checks on one specific building. The two that decide most outcomes - the deduction list and whether the income covers the borrowing - are the two that never appear in a listing. (14 min)
• Yield-based valuation: pricing the income — Start from the money the asset actually pays out and the return you require, and the price falls out of the division. The simplicity is real, and it conceals the same growth assumption everything else makes. (11 min)

All 578 terms in the Investing glossary