NOI vs. ROI in real estate: Are they the same thing? A guide for investors
In the world of real estate investment, two abbreviations appear extremely frequently: NOI (Net Operating Income) and ROI (Return on Investment). Although they sound similar and are both used to assess profitability, they do not mean the same thing. In this article, we explain how they differ, how they are calculated, and why both are crucial when analyzing investments in apartments, business premises or commercial real estate.
What is the NOI?
NOI (net operating income) is an indicator that shows the income generated by a property after deducting operating expenses, such as:
- property management,
- Insurance,
- property taxes,
- building maintenance.
However, it does not take into account financing costs (such as loan installments) or depreciation.
Formula for NOI:
NOI = Przychody z najmu - Koszty operacyjne
This is an indicator that shows the income potential of a property regardless of how it is purchased.
What is ROI?
ROI (return on investment) is an indicator that shows how effectively an investment generates profit.
ROI formula:
ROI = (Zysk netto / Całkowity koszt inwestycji) x 100%
Unlike NOI, ROI takes into account the cost of purchase, notary fees, commissions and other expenses, as well as net income after deducting financing costs (such as a loan).
Key differences between ROI and NOI
| Feature | NOI | ROI |
|---|---|---|
| Does it take credit into account? | NO | YES |
| Refers to operating income? | YES | NO |
| Used to compare properties? | YES | PARTLY |
| Shows the efficiency of the investor? | NO | YES |
Why is it important to know both indicators?
Both NOI and ROI are essential for making an informed investment decision:
- TheNOI will help you assess whether the property is generating a stable income.
- The ROI will show whether the investment pays off after all costs are taken into account.
If you are planning to buy a property with a loan, ROI will give you a more complete picture of the profitability of your investment. If you are comparing several properties for income potential, focus on NOI.
Which better reflects the value of the property?
NOI is often used when valuing commercial real estate, as it shows the real income that can be derived from it. ROI is better suited for assessing profitability for an investor.
Example from life:
Imagine two properties, each with a net operating income (NOI) of PLN 60,000 per year.
- One of them costs PLN 800,000 and the other PLN 1,200,000.
- The ROI in the first case is 7.5%, in the second 5%.
Despite the identical NOI, the investor may choose the one with the higher ROI.
See our guide: How to buy an apartment in Poland as a foreigner
Summary
NOI and ROI are two different tools that investors should know and use depending on the purpose of the analysis.
- The NOI shows the profitability of the property,
- ROI shows the effectiveness of the investment.
If you want to assess the value of a property – analyze NOI.
If you want to decide where to invest your money – count ROI.
Want to invest in real estate with passive income?
👉 Contact us: Contact Atlant Estates
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