Is EBITDA the Same as NOI?

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September 30, 2022

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Before investing in real estate, it is essential to carry out a detailed analysis of the financial status of the prospective investment. With the correct calculations, investors can make informed investments to make profits. EBITDA and NOI are examples of these calculations, however, is EBITDA the same as NOI?

Is EBITDA the Same as NOI?

No, EBITDA is not the same as NOI. It is a common mistake to confuse these terms since they are both metrics used to measure the profitability of a business or property without including income taxes, cost of loans, or amortization. However, in reality, they imply different things.

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The significant difference between EBITDA and NOI is that while EBITDA measures a company’s overall profitability from its significant operations, NOI is used to measure the profitability of an income-generating real estate investment, whether commercial or residential. 

What Is EBITDA?

Earnings Before Interest, Taxes Depreciation, and Amortization (EBITDA) measure the profits of a business by subtracting expenses such as general and administrative costs from total earnings. It does not deduct expenses that are not directly related to the company’s operations because these expenses are not under the control of the management.

Such expenses include amortization and depreciation, interest paid on debt, and income taxes on business revenue. It is therefore employed to demonstrate the company’s financial status and earning potential without the influence of its capital structure and accounting protocols. 

It is also one of the significant financial tools for evaluating and comparing several firms with different sizes, structures, taxes, and depreciation. However, it is essential to note that EBITDA is a non-GAAP calculation of profitability. Hence, companies are not obliged to report EBITDA on their financial statements.

How to Calculate EBITDA

You can calculate Earnings Before Interest, Taxes Depreciation, and Amortization (EBITDA) using these widely acceptable formulas:

  • EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

OR

  • EBITDA = Operating Profit + Depreciation + Amortization

Where:

  1. Net income is the profit left after the total expenses incurred by the company have been deducted 
  2. Interest expenses arise from borrowed funds to finance the company’s activities
  3. Taxes at the federal, state, and local levels, such as corporate tax
  4. Depreciation expenses are based on the deterioration of the company’s tangible fixed assets over time
  5. Amortization expenses are based on the deterioration of intangible assets. 
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When Should a Real Estate Investor Use EBITDA?

EBITDA can be used as an indicator of financial stability in several situations, such as:

  • Comparing and evaluating two companies in different locations, especially startups 
  • Drawing up loan conditions and finding out if a company has the means to pay its debt by determining its income potential
  • Deciding on a business’s valuation, especially for a sale or acquisition.

While EBITDA may be a popularly used indicator of financial performance, it can be tricky to use it as a single measure of earnings. A company can paint an incomplete or more attractive financial picture by altering its EBITDA performance. Thus, diverting investors’ attention away from outstanding debt levels and unattractive expenses compared to the income generated.

What Is NOI?

Net operating income (NOI) is a metric used to define the value and profitability of property by deducting operating expenses from gross income. These operating expenses include maintenance costs, insurance premiums, legal fees, property taxes, etc. It does not consider interest, taxes, capital expenditures, tenant improvement, depreciation, or amortization expenses.

How to Calculate NOI

Net operating income can be calculated using the popularly accepted formula: Net operating income = R – OE, where R is the total revenue generated by real estate investment and OE is the total operating expenses. Revenue from real estate includes rental income, parking costs, service charges, vending machines, and laundry machines. 

Operating costs include all the expenses linked with managing the property. They include property management fees, insurance, utilities, property taxes, and repair and maintenance costs. Net operating income is mainly used when considering potential deals to determine the profitability of the prospective property, whether commercial or residential rental property. 

When Should a Real Estate Investor Use NOI?

Net operating income can be utilized to calculate other real estate calculations that can help investors assess potential deals. Some of these calculations include:

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  • Capitalization Rate: This formula reveals the rate at which a property will generate returns by dividing the annual net operating income by the purchase price of a property
  • Debt Service Coverage Rate: This formula analyzes NOI concerning the annual mortgage debt service to determine if a lender should finance a particular property or not
  • Return On Investment: The Return on Investment formula helps investors determine the potential cash flow of a property by dividing NOI by the buying price of a property, then multiplying the result by 100
  • Cash On Cash Returns: This formula enables investors to estimate the yearly investment returns by analyzing NOI in relation to the initial cash investment made on a property.

Generally, you might find it challenging to calculate your NOI, especially if you are new to investing in real estate. To ensure that you get your calculations and figures right, it is advisable to hire the assistance of a real estate company when purchasing a property. 

Si Vales Valeo Real Estate is a real estate agency located in the Cincinnati/Northern Kentucky area, with professional agents who have vast experience in determining the potential profitability of any property by calculating its NOI through CRE analysis alongside other metrics. Work with them to ensure that you make only the best decisions regarding property investment.  

Related Questions

What Is a Good EBITDA Margin by Industry?

In most industries, an ideal EBITDA margin ranges from 60% and above. It is recommended to have a high EBITDA margin for a business or investment property to yield profits. A high EBITDA margin indicates that the business has lower operating expenses than its total income

When Is the 2% Rule?

The 2% rule states that a prospective rental property, whether residential or commercial, would produce positive returns if the monthly rent is at least 2% of the total purchase price. For example, if a rental property costs $100,000, then its rental income has to be at least $2,000 to meet the 2% rule.

Conclusion 

EBITDA and NOI are indicators that investors and lenders use to analyze a company or investment’s financial picture and profitability before making major financial decisions. This information will help investors understand the difference between both indicators and how to calculate each to make the right decision concerning an investment. 

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