What is NOI (Net Operating Income)?
Net operating income or NOI is used in two very important real estate ratios. It is an essential ingredient in the Capitalization Rate (Cap Rate) calculation that is used to estimate the value of income producing properties… Another important ratio that is used to evaluate income producing properties is the Debt Coverage Ratio or DCR. The NOI is a key ingredient in this important ratio also. Lenders and investors use the debt coverage ratio to measure a property’s ability to pay it’s operating expenses and mortgage payments. A debt coverage ratio of 1 is breakeven. Most lenders require minimum of 1.1 to 1.3 to be considered for a commercial loan. From a bank’s perspective, the larger the debt coverage ratio, the better.
