Net Operating Income for an Apartment Building: What Counts, What Does Not, and Where It Sits on Your P&L

What is net operating income for an apartment building?

Net operating income is an apartment building's rent and other income minus the costs of running it. It is counted before the loan payment. On the P&L it sits below the cost lines and above the loan.

Read the P&L from the top. Rent if full, less vacancy and concessions, plus other income, is the income. Then come the 7 running cost groups. The line under them is net operating income. The loan payment comes after it. Lenders and buyers use this number, so it has to be right. Net operating income is one line of an apartment building profit and loss, line by line.

What counts toward an apartment building's net operating income, and what does not?

Rent earned, other income and every running cost count, including property tax, insurance and the management fee. The loan payment, tenant deposits, reserve deposits, big improvements and the owner's own costs do not.

Here are the 2 lists, with the account each item lands in on our apartment chart of accounts.

Money that is not income stays out: tenant deposits, owner money, loan money. Money that is not a running cost stays out too: reserve deposits, big improvements and the owner's own costs. What belongs in each running cost group is in apartment building operating expenses.

Does an apartment building's net operating income include the loan payment?

No. Net operating income is counted before the loan. Interest and principal are both subtracted below it. On the example, $41,150 less the $33,500 loan payment leaves $7,650.

Birch Way, one month, invented data

A lender may count the number its own way, and the loan documents say how, so the books keep the lines apart and either version can be shown. How the number compares with the loan payment is the debt service coverage ratio for an apartment building.

Does an apartment building's net operating income include property taxes?

Yes. Property tax is a cost of running the building, so it is subtracted before net operating income. So are insurance and the management fee.

At Birch Way the $27,000 of running costs includes $4,600 of property tax, $1,900 of insurance and $2,700 of management fee. All 3 are subtracted before the $41,150 of net operating income. The property tax line is the month's share of the yearly bill, so the number does not jump in the month the bill is paid.

How do you calculate net operating income for an apartment building?

Start with rent if full. Subtract vacancy and concessions, and add other income. Then subtract operating expenses. On the example: $68,150 of income less $27,000 of costs is $41,150 a month.

1. 1Start with rent if full and subtract vacancy and concessions. That is rent earned. At Birch Way, $72,500 less $4,350 of vacancy is $68,150.
2. 2Add other income: laundry, parking, pet rent, late fees and utility bill-backs. That is income. The sample month has none, so income is $68,150.
3. 3Subtract the running costs. At Birch Way, $68,150 less $27,000 is $41,150 of net operating income for the month.

Birch Way, one month, invented data

To run your own numbers, use the apartment NOI calculator.

What is net operating income per unit for an apartment building?

Divide net operating income by the number of units. The example earns $41,150 a month across 50 units, which is $823 a unit a month.

For 12 months at the same pace, Birch Way earns $493,800, or $9,876 a unit. The number per unit lets a 50-unit building and a 12-unit building be read side by side, from the same P&L.

Is an apartment building's net operating income the same as profit or cash?

Neither. Net operating income leaves out the loan payment, so it is larger than the cash left. It also leaves out improvements and money set aside in reserves.

There are no tax lines on this P&L; your CPA adds those at year end.

Which bookkeeping mistakes distort an apartment building's net operating income?

3: a tenant deposit recorded as income, a reserve deposit recorded as a running cost, and the owner's own costs recorded in the building. The first raises the number. The other 2 lower it.

Here are the 3 cases on the Birch Way month, each against the right $41,150.

The 3 distortions at Birch Way, invented data

The first mistake raises the number by $750. The other 2 lower it by $1,050 and $400. Each one is fixed by moving the entry to the account it belongs in; the P&L then shows $41,150 again. Why a deposit is owed back and is never income is in security deposit accounting for apartment buildings.