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Net operating income (NOI) and EBITDA (earnings before interest, tax, depreciation, and amortization) are similar metrics used to measure a company’s profitability based on its core business operations. Different industries tend to choose different metrics. NOI is generally used in real estate to evaluate income-producing properties, whereas EBITDA is most often used to measure how efficiently a company is operating and how it compares to competitors.
Here’s a closer look at NOI vs. EBITDA, how each one is calculated, their similarities and differences, and why they are both important.
Key Points
• Net operating income (NOI) focuses on property-level profitability by excluding non-operating costs like taxes, while EBITDA measures overall business earnings before interest, taxes, depreciation, and amortization.
• NOI is commonly used in real estate to assess a property’s performance, while EBITDA is used across various industries to evaluate business profitability.
• The formula for EBITDA is “Net Income + Taxes Owed + Interest + Depreciation + Amortization.”
• The formula for NOI is “Gross Operating Income – Operating Expenses.”
• The main difference between the two metrics is that EBITDA does not account for lost revenues from vacancies.
What Is Net Operating Income?
Net operating income, or NOI, is a measurement used to determine the profitability of an income-producing property. NOI determines the revenue of a property by subtracting operating expenses from gross operating income. While NOI is most frequently used in the real estate industry, it can be used by any company that earns income from a property.
With NOI, a property’s gross operating income takes into account losses due to vacancies.
As a rule of thumb, an expense is considered an operating expense if not spending money on that cost would jeopardize the asset’s ability to continue producing income. Operating expenses commonly include property taxes, vendor and supplier costs, maintenance and repair, insurance, utilities, licenses, supplies, and overhead costs, such as expenses for accounting, attorneys, and advertising.
Since income taxes, loan interest and principal payments, capital expenditures (money spent on improvements or repairs), and amortization and depreciation (the gradual write-off of long-term assets) do not impact the potential of a real estate investment to make money, they are not included in NOI.
A lender may look at a company’s NOI if the company is applying for a small business loan, such as a commercial real estate loan.
How to Calculate Net Operating Income
NOI measures a property’s ability to generate a profit from its operations. The NOI formula is:
NOI = Gross Operating Income – Operating Expenses
Pros and Cons of Using NOI
While NOI can give potential investors and lenders a good indication of how profitable a property will be, it also has some drawbacks. Here’s a look at the pros and cons of using NOI.
| Pros of NOI | Cons of NOI |
|---|---|
| Helps determine the initial value of a potential investment property | Future rents and cash flow can be difficult to predict, which means NOI can sometimes be inaccurate |
| Gives investors a good idea of how much revenue they can expect to make | NOI may vary depending on how the property is managed |
| Indicates to lenders if the rental property is a safe or risky investment | Investors may use slightly different methods to calculate NOI, so it isn’t universal |
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What Is EBITDA?
EBITDA (earnings before interest, taxes, depreciation, and amortization) is used to calculate the earnings that a business has generated from its core operations.
To calculate a company’s annual earnings, EBITDA factors in the cost of goods sold, general and administrative expenses, and other operating expenses. However, it doesn’t subtract costs that are not directly related to the company’s operations, namely interest paid on debt, amortization and depreciation expenses, and income taxes on business revenue. The reason is that these costs are outside management’s operational control.
Many analysts believe that, by adding these values back to net income (which is gross business income minus all business expenses), EBITDA can be a better measure of company performance because it shows earnings before the influence of accounting and financial deductions. EBITDA can also be useful for comparing firms with different sizes, structures, taxes, and depreciation.
Your company’s EBITDA might be calculated by a potential investor or by a creditor when you’re applying for a business loan because it provides a snapshot into how well your company will be able to pay its bills and maintain or increase net income.
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How to Calculate EBITDA
The two most commonly used ways to calculate EBITDA include:
Option 1: Start with net income (the bottom line of the income statement), and then add back the entries for taxes, interest, depreciation, and amortization.
Net income + Taxes Owed + Interest + Depreciation + Amortization = EBITDA
Option 2: Start with operating income (also referred to as operating profit) and add back depreciation and amortization.
Operating Income + Depreciation + Amortization = EBITDA
Pros and Cons of Using EBITDA
Pros of using EBITDA include:
• It offers a clear view of operational performance by excluding non-operational expenses like interest, taxes, depreciation, and amortization.
• EBITDA simplifies comparison across companies with different capital structures.
• It helps assess cash flow potential and operational efficiency.
Cons of using EBITDA include:
• It can obscure important financial costs, such as debt and capital expenditures, leading to an incomplete financial picture.
• EBITDA may overstate profitability by ignoring non-cash expenses.
• Investors might be misled about a company’s long-term financial health if they focus solely on EBITDA.
NOI vs EBITDA Compared
NOI and EBITDA have some similarities, but also a few key differences. Here’s how the two formulas compare.
Similarities
Both NOI and EBITDA measure the profitability of a business or property without including income taxes, the cost of loans, amortization, or depreciation as expenses. NOI is essentially EBITDA within a real estate context. By stripping away incidentals, both NOI and EBITDA level the playing field, which makes them useful for comparing different properties and businesses.
Banks will often look at NOI or EBITDA (depending on a borrower’s industry) before giving the green light on different types of business loans. These metrics help them determine whether or not the business will have the cash flow to pay back the loan.
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Differences
NOI is primarily used to evaluate the profitability of an investment in a commercial or residential real estate property. EBITDA, on the other hand, is primarily used to evaluate the profitability of a company. As a result, NOI takes into account revenues lost due to vacancies, whereas EBITDA does not.
| EBITDA | NOI | |
|---|---|---|
| Loan size | Larger | Smaller |
| Evaluates profitability of a business | âś“ | âś“ |
| Accounts for revenues lost due to vacancies | X | âś“ |
| Excludes income taxes | âś“ | âś“ |
| Excludes cost of loans | âś“ | âś“ |
| Excludes amortization and depreciation expenses | âś“ | âś“ |
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Example of EBITDA vs Net Operating Income
Let’s look at a comparison of net operating income vs. EBITDA when they’re applied to a business. Note that here gross operating income is equivalent to gross revenues minus vacancy losses.
Let’s say you’re considering purchasing a multi-tenant apartment building. You know the property already brings in gross revenues of $1.5 million. Operating expenses are $500,000, and other expenses include:
• Lost revenues from vacancies: $50,000
• Interest: $4,000
• Tax: $100,000
• Depreciation: $50,000
• Amortization: $25,000
Here’s how to calculate the property’s NOI:
NOI = Gross Revenues ($1.5 million – $50,000 in vacancies) – Operating Expenses ($500,000)
NOI = $950,000
While EBITDA is not typically used to calculate profits of real estate, for the sake of comparison, let’s look at what the building’s EBITDA would be.
To calculate EBITDA, you first need to figure out net income, which is gross revenues minus operating expenses:
$1.5 million (gross revenue) – $679,000 (operating expenses) = $821,000 (net income)
EBITDA = Net Income ($821,000) + Taxes Owed ($100,000) + Interest ($4,000) + Depreciation ($50,000) + Amortization ($25,000)
EBITDA = $1,000,000
The difference between the two – $50,000 – represents the income lost to vacancies, which is not factored into EBITDA.
How Lenders Use NOI and EBITDA
Lenders may find the metrics NOI and EBITDA useful as they assess a company’s operational efficiency. Both focus on operations and help investors see whether an investment is likely to make enough to comfortably pay its operations. But there are various reasons that they may choose net operating expenses or EBITDA in specific situations.
Lenders may use net operating income vs. EBITDA specifically for evaluating commercial and residential real estate.
EBITDA is used primarily to assess overall operational profitability of corporations and small businesses. It ignores capital structure and accounting methods.
Is EBITDA the Same as Operating Income?
EBITDA and operating income are both metrics used to evaluate a company’s profitability. But if you’re wondering whether EBITDA is the same as operating income, no, it’s not. Operating income shows what a company makes from its operations minus its operating costs and the non-cash expenses depreciation and amortization. It provides a look at what a company makes from operations.
EBITDA is a company’s earnings before interest, tax, depreciation, and amortization. Unlike operating income, it adds back depreciation and amortization, as well as interest paid on debt and income tax.
Obtaining Small Business Financing
Both NOI and EBITDA calculate a company’s profitability by subtracting operating expenses from revenues. In addition, both metrics exclude income taxes, debt expenses, depreciation, and amortization, since these expenses are not related to the company’s core operations.
The key difference between NOI and EBITDA is that NOI is used for real estate and EBITDA is used for general businesses.
When you’re applying for small business loans, a lender will likely look at your NOI or EBITDA (depending on your company’s industry), along with other key financial metrics, to see whether you have enough positive cash flow to comfortably make payments on the loan.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Does net operating income mean the same thing as EBITDA?
Net operating income, or NOI, and EBITDA (earnings before interest, tax, depreciation, and amortization) are similar ways to calculate a business’s profitability. However, NOI is used for an income-generating property and EBITDA is used for a general business.
Should EBITDA or NOI be higher?
If you’re wondering which is higher – net operating income or EBITDA – think of it this way. If you used EBITDA (earnings before interest, tax, depreciation, and amortization) and NOI (net operating income) to evaluate the same income-producing property, EBITDA would be higher because it does not account for lost income due to vacancies.
Can you have a negative EBITDA?
Yes, if a company has poor cash flow, its EBITDA (earnings before interest, tax, depreciation, and amortization) can be negative.
What is a good EBITDA margin?
What’s considered a good EBITDA margin depends on the industry of the business being assessed, as well as its growth stage and size. But generally, a good EBITDA margin tends to fall between 15% and 25% or more.
When should I use net income vs. EBITDA to evaluate a business?
When it comes to net income vs. EBITDA, net income is a company’s total revenue minus all expenses, and EBITDA is what the company earned before interest, taxes, depreciation, and amortization. Net income is typically used to show investors and shareholders how profitable a company is, and EBITDA is used in business valuation and mergers and acquisitions.
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