Understanding Net Operating Income (NOI)

Real Estate 101 for Tech Startups

Last week, I talked about the fundamental disconnect between the language of startups and real estate professionals. Startups often think like customers, creating tech they would enjoy in their own lives; in contrast, real estate professionals make major decisions based on Net Operating Income (NOI).

What IS NOI?

PropertyMetrics defines Net Operating Income as:

Net operating income (NOI) is a calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus all reasonably necessary operating expenses.

Simply put, NOI is how much money a building makes, calculated as the difference between a building’s income and expenses.

Think of a building as a business. A business makes a profit if they earn more than they spend. Accordingly, a business with higher profits is worth more money.

NOI works the same way. Every building is a business: each property has income (rent) and expenses (utilities, repairs and maintenance). A better NOI means that a building is making more money. When a building makes more money, it appreciates as an asset. There are other important metrics, but they’re more complex due to variables like market demand and capital structures. NOI is ideal for real estate startups to focus on because it’s a crucial and simple metric.

The final decision whether to purchase and install your tech in a building is based almost entirely on NOI. If your technology doesn’t help the building create money, it doesn’t make financial sense for the decision-maker to buy it.

The good news? Your technology probably DOES improve NOI, but you won’t know for sure until you collect and evaluate the data. This task is well-worth the time and effort because improved NOI is a tremendous value proposition, beneficial to anyone you would pitch to in the real estate industry.

So, instead of talking about about how cutting-edge your tech is or how tenants will love it, show that it increases a building’s NOI. Explain how it cuts costs or lowers vacancy. Illustrate the overall value to their building. Prove that it will raise rents or eliminate overhead.

BETTER NOI. That’s the pitch. If it’s true, you’re well on your way to making a deal.

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UP NEXT: Targeting the Top Line.

Check out my post from last week, “How Do I Pitch My Tech to the Real Estate Industry?”

Questions about real estate technology or smart cities? You can find me on Twitter @CherylFoil.