App version: 0.1.0

Net Operating Income vs EBITDA: Similarities, Differences, and How to Calculate

Net Operating Income vs EBITDA: Similarities, Differences, and How to Calculate
Susan Guillory
Susan GuilloryUpdated May 4, 2022
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Net operating income (NOI) and earnings before interest, tax, depreciation, and amortization (EBITDA) are two similar metrics used to measure a company’s profitability based upon its core business operations. However, different industries use them. NOI is used in real estate to evaluate income-producing properties, whereas EBITDA is most often used to compare companies’ profit-making potential.Here’s a closer look at NOI vs. EBITDA, how each one is calculated, their similarities and differences, and why they are important.

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 gross operating expenses from gross 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 income is everything it earns minus any 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 company or real estate investment to make money, they are not included in NOI. 

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

What Is EBITDA?

Earnings before interest, taxes, depreciation, and amortization (EBITDA) 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 of management’s operational control. By adding these values back to net income (which is gross business income minus all business expenses), many analysts believe that EBITA 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 may 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. 

How to Calculate EBITDA

It’s easy to calculate EBITDA. Here are the two most commonly used ways.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 = EBITDAOption 2: Start with operating income (also referred to as operating profit or EBIT –  earnings before interest and taxes). This is the amount of revenue left after deducting the direct and indirect operating costs from sales revenue. If you add depreciation and amortization to operating income you get EBITDA.Operating Income + Depreciation + Amortization = EBITDARecommended: EBITDA vs Revenue: How They Are Different & How They Are Used 

NOI vs EBITDA 

NOI and EBITDA have some similarities, but also a couple of 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, 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 use 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.

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 lost revenues from vacancies, whereas EBITDA does not.
EBITDANOI
Evaluates profitability of a business✓✓
Accounts for lost revenues from vacanciesX✓
Excludes income taxes✓✓
Excludes cost of loans✓✓
Excludes amortization and depreciation expenses✓✓

Example of EBITDA vs Net Operating Income

Let’s look at how NOI and EBITDA compare when they are applied to a business. 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 = $950,000While EBITDA is not typically used to calculate profits of real estate, let’s look at what the building's EBITDA would be for the sake of comparison.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 = $1,000,000The difference between the two – $50,000 – represents the lost income to vacancies, which is not factored into EBITDA.

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 NOICons of NOI
Helps determine the initial value of a potential investment propertyFuture 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 makeNOI may vary depending on how the property is managed
Shows lenders if the rental property is a safe or risky investmentInvestors use slightly different methods to calculate NOI, so it isn’t universal

The Takeaway

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.If you’re interested in seeking out a small business loan, a lender will likely look at your NOI or EBITDA (depending on your company’s industry), along with other key financial ratios, to see whether you have enough positive cash flow to comfortably make payments on the loan. 

3 Small Business Loan Tips 

  1. Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders.
  2. If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.
  3. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.

Frequently Asked Questions

Does net operating income mean the same thing as EBITDA?
Should EBITDA or NOI be higher?
Can you have a negative EBITDA?
Photo credit: iStock/pixelfit
LCSB0322004

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
Share this article: