Defining Net Operating Income and Net Cash Flow

[Adam Franco]

Hey BP community after skimming through the forums I noticed a common thread, net operating income (NOI) is frequently confused with net cash flow (NCF), so let's clear it up! Since we are in the Multi-family (MF) forums, we will look at this from a MF perspective. Let's say we have a property bringing in monthly rents, let's call that gross income or, if vacancy and other credit losses are included, we will call that effective gross income (EGI). Then, we move to expenses. Expenses include any necessary expenses to run the property. These expenses commonly include, repairs/maintenance(NOT Capex, we will get to that later), administrative, property tax, property insurance, property management, etc. These are all expenses. Now refer back to the beginning when we had EGI or gross income. If we subtract expenses from our Gross Income we get our NOI (Income-expenses=NOI). Notice we have not yet included debt service (loans/financing, etc) or capital reserves. So if we take capital expenditures/reserves, debt service and depreciation from our NOI, we get our net cash flow (NCF). This number can vary greatly, so it is necessary to know what your goals are in order to interpret these numbers. It also helpful to break down your NOI per unit to help analyze the property. Ex: NOI/total # of units=NOI per unit, same works with NCF. One last thing, the why. Why is this important? Well it may not be. An example where it would be is when dealing with banks/lenders they look at specific ratios when looking at these numbers. Hope this helps, please comment with more questions.

[Brian Burke]

Nice write-up, @Adam Franco, and you are correct that there is a lot of confusion related to some of the terminology used in real estate.  That's what makes BP so great...people getting started have this great resource to turn to in order to learn.

I'm right there with you up to the definition of NOI, but there is one correction to make to the definition of Net Cash Flow. From NOI you would subtract capital expenditures / reserves and debt service to arrive at NCF. Separately, you would subtract depreciation, amortization, interest and non-operating expenses (such as partnership level expenses) from NOI to arrive at Net Income (which is distinctive from Net Operating Income and is most relevant to tax preparation).  Depreciation isn't a component of the calculation of Net Cash Flow, as it is a non-cash item.