In the world of real estate investments, two acronyms appear very frequently: NOI (Net Operating Income) and ROI (Return on Investment). Although they sound similar and both are used to assess profitability, they do not mean the same. In this article, we explain how they differ, how to calculate them, and why both are crucial when analyzing investments in apartments, commercial spaces, or commercial properties.
What is NOI?
NOI (Net Operating Income) is a metric that shows the income generated by a property after deducting operating costs such as:
- property management,
- insurance,
- property taxes,
- building maintenance.
It does not include financing costs (e.g., loan payments) or depreciation.
Formula for NOI:
NOI = Rental Income - Operating Costs This is a metric that shows the income potential of a property regardless of how it was purchased.
What is ROI?
ROI (Return on Investment) is a metric that shows how effectively an investment generates profit.
Formula for ROI:
ROI = (Net Profit / Total Investment Cost) x 100% In contrast to NOI, ROI includes the purchase cost, notary fees, commissions, and other expenses, as well as net income after deducting financing costs (e.g., loans).
Key Differences Between ROI and NOI
| Feature | NOI | ROI |
|---|---|---|
| Includes loan? | NO | YES |
| Relates to operating income? | YES | NO |
| Used to compare properties? | YES | PARTIALLY |
| Shows investor efficiency? | NO | YES |
Why is it important to know both metrics?
Both NOI and ROI are essential for making informed investment decisions:
- NOI will help you assess whether a property generates stable income.
- ROI will show whether the investment is worthwhile after considering all costs.
If you plan to purchase a property with a loan, ROI will give you a fuller picture of the investment's profitability. If you are comparing several properties for income potential, focus on NOI.
What better reflects the value of a property?
NOI is often used in valuing commercial properties as it shows the real income that can be obtained from it. ROI is better suited for assessing profitability for the investor.
Real-life example:
Imagine two properties, each with a net operating income (NOI) of 60,000 zł per year.
- One costs 800,000 zł, and the other 1,200,000 zł.
- ROI in the first case is 7.5%, in the second 5%.
Despite having 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.
- 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 money – calculate ROI.
Do you want to invest in properties with passive income?
👉 Contact us: Contact Atlant Estates
References