Hospitality has its own financial language, and NOI is one of those terms that gets thrown around like everyone should just know it. But when you’re focused on occupancy, guest satisfaction, staffing, and keeping the property running smoothly, it’s not always obvious how this one number fits into the bigger picture. 

NOI stands for “net operating income,” which is the profit your hotel generates after subtracting operating expenses. Your debt payments, income taxes, and any other fees come later.

Here is the basic net operating income formula:

NOI = Total Operating Revenue – Total Operating Expenses

So, if your hotel brought in $500,000 in total revenue after $350,000 in operating costs, you’d be left with a net operating income of $150,000. Easy, right?

Unfortunately, it’s not that simple—there are a few other numbers to consider in your equation. When breaking down what hotel NOI is, you’ll factor in room revenue, food and beverage sales, and any event income you make. Parking, resort fees, and other income can also be included in your hotel’s final number. Operating costs can include departmental expenses, undistributed expenses (marketing, maintenance, etc.), and fixed operating costs.

Now, is anything not included in your final NOI? Yes. Debt services, income taxes, capital improvements (roof repairs, renovations, etc.), and any form of depreciation will not affect the final number. This is because NOI is designed to measure how the property performs as an operating asset, independent of how it’s financed.

Why Does NOI Matter?

We know what NOI is, but why should we care? Think of it this way: hotel NOI is more than just profit numbers on a screen or spreadsheet. In the hospitality world, your net operating income directly connects your operations to your property’s overall value. That’s a big deal. Why?

NOI Determines What Your Hotel Is Worth

When determining your hotel’s value, you’ll probably use something called a ‘cap rate.’ This is calculated with a simple formula: NOI ÷ cap rate. If your hotel produces $1 million in NOI at a cap rate of 8%, you’d have a $12.5 million valuation. If your NOI increased to $1.2 million, you’d have a $15 million valuation. So, the higher your NOI, the more likely your hotel is to have a high market value.

Investors Analyze NOI

Another big reason you need to know what NOI is involves raising capital. If you ever need to refinance or bring in new investors, the first question probably won’t be, “How busy is your property?” The conversation will likely center around your financials, including what your net operating income is. This will help investors get a better idea of how risky or profitable their investment may be.

It Separates “Busy” From “Profitable”

Finally, when looking at operating income vs. net income, you can gain a clearer picture of how much money your portfolio is bringing in. Are your rooms full? Is your restaurant active? If so, you’ll likely have a higher NOI, which is music to any hotelier’s ears. 

NOI vs GOP

Whereas NOI is net operating income, GOP stands for “gross operating profit.” The difference is evident in the name—net income, versus gross profit. GOP is revenue minus any departmental expenses and undistributed operating expenses, and NOI starts from the gross operating profit number and further subtracts “below the line” items such as management fees, property taxes, and insurance. GOP represents how well a property is operationally run, and NOI is the number more often used for valuation.

An easy way to remember the difference between the two is GOP is EBITDA before considering fixed charges, and NOI is closer to what a buyer or appraiser cares about when valuing the hotel as an asset.

How Can You Improve NOI?

You know what your NOI total is; how can you boost it? The good news is, it doesn’t always require massive renovations or dramatic overhauls. Often, NOI growth comes down to tightening operations and being intentional about where revenue grows.

Here are a few areas where you can shift your focus:

Strengthen Your ADR Strategy

One of the best ways to drive net operating income is through your average daily rate (ADR). If you’re discounting too heavily to boost occupancy, you may be leaving profits on the table. Small ADR increases, even just $5-10 a night, can significantly impact your annual revenue. And because most operating costs don’t rise at the same pace, a portion of that added revenue flows straight to NOI.

Increase Labor Efficiency

Labor is often your most controllable expense as a hotel owner. Since payroll plays a major role in your final NOI number, you’ll want to make sure your money is well spent. This doesn’t mean cutting jobs or taking away from the guest experience, rather:

• Aligning schedules with occupancy forecasts
• Cross-training staff where appropriate
• Monitoring overtime carefully

Even the slightest improvements to labor efficiency can make a big difference when all is said and done.

Control Vendor Costs

Expenses have a way of adding up quickly in this industry. Laundry contracts, linen services, food suppliers, and maintenance partners are just a few. Ensure you’re saving money where you can to directly increase your hotel’s net operating income.

USALI-Compliant Reporting

NOI is only as accurate as the numbers used in the formula, and those numbers have to be classified consistently in order to stay accurate. That’s why USALI (Uniform System of Accounts for the Lodging Industry) compliance is so important. Under USALI, every property has to have book revenue and costs in the same standardized departmental buckets every month.

Hotel accounting platforms like M3 are built to be GAAP and USALI compliant, offering finance teams inherent structure and consistency that keeps NOI completely accurate. M3 even comes with the added benefit of business intelligence and insights to help turn your data into actionables that have an impact on your bottom line. With M3, NOI means the same thing across every property in your portfolio—which is one of the main points of tracking it in the first place.

Get an Accurate View of Your Net Operating Income with M3

Understanding and maximizing your hotel NOI starts with M3’s award-winning hospitality accounting software. Our platform provides accurate, real-time reporting so you can always manage intentionally and plan with confidence. Features such as anomaly detection and automated variance flags protect your NOI, providing your team with reliable data that can be transformed into insight quickly and accurately.

Schedule a consultation to learn more about our accounting solutions, from back-office software to outsourced accounting support.

FAQs

What is a good NOI for my property?

In the hospitality industry, a net operating income rate of 15% is typically the minimum. However, most portfolios target 25-40%.

How can I calculate net operating income?

Use the following net operating income formula: Total Revenue – Operating Expenses. This will help you calculate what your NOI is.

What is the difference between operating income and net income?

Operating income reflects profit generated from core business operations before interest and taxes. Net income is the final profit after all expenses are deducted.

What does NOI stand for?

NOI stands for “net operating income.”

How do you calculate NOI for a hotel?

NOI is calculated by subtracting total operating expenses from total operating revenue. If you need help calculating your NOI, check out our free NOI calculator.

What is the difference between NOI and GOP?

NOI is net operating income, whereas GOP is gross operating profit. NOI measures how much profit is left after fixed ownership costs are deducted from a hotel’s profit, whereas GOP measures operating performance while under management’s control.

What is a good NOI margin for a hotel?

A “good” NOI is going to differ depending on property type, market, and service level. Factors that affect this margin the most are service model, brand or franchise fees, market and seasonality, and the age/condition of your property.