Net operating income
A property's rental income less vacancy losses and operating expenses, before financing costs, income tax and depreciation. The figure the income approach capitalises into a value.
Where you will meet it
Net operating income appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Outline the main methods for valuing real estate
“The income approach capitalises expected net operating income, either by dividing a stabilised figure by a capitalisation rate or by discounting a forecast cash flow stream.”
- Set out the economic drivers of investment in commercial property
“A simple valuation is net operating income divided by a capitalisation rate, and the cap rate moves with real rates, expected rent growth and a risk premium for illiquidity and cyclical exposure.”
- Explain how due diligence is carried out on real estate investments and the approaches used to value them
“Under direct capitalisation, with a cap rate roughly equal to the discount rate minus expected growth in income, value is V = next year's net operating income ÷ cap rate.”
See also
Practise it
Practise net operating income until it is automatic: questions that explain every wrong option.
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