What is NOI in real estate?

NOI (Net Operating Income) is the annual income a property generates after deducting all operating expenses, but before deducting debt service and income taxes. It's calculated as: NOI = Gross Income - Operating Expenses. NOI is the foundation of commercial real estate valuation and is used to calculate cap rate, debt service coverage ratio, and other key metrics.

How do you calculate NOI?

To calculate NOI: 1) Start with Potential Gross Income (total possible rental income). 2) Subtract vacancy and credit loss to get Effective Gross Income. 3) Add other income (parking, laundry, storage). 4) Subtract all operating expenses (property taxes, insurance, maintenance, utilities, property management). Formula: NOI = Effective Gross Income + Other Income - Operating Expenses.

What expenses are included in NOI?

Operating expenses included in NOI calculation: property taxes, insurance, repairs and maintenance, utilities, property management fees, landscaping, snow removal, marketing/advertising, legal/accounting fees, and administrative costs. Do NOT include: mortgage payments, capital expenditures, depreciation, income taxes, or tenant improvements.

What's the difference between NOI and net income?

NOI (Net Operating Income) is the property's income after operating expenses but before debt service and taxes. Net Income is what remains after ALL expenses, including mortgage payments, capital expenditures, and income taxes. NOI measures the property's operational performance independent of financing, while net income shows actual cash flow to the owner after all obligations.

Why is NOI important?

NOI is crucial because it: 1) Measures a property's true operational performance, 2) Is used to calculate cap rate (value = NOI ÷ cap rate), 3) Determines borrowing capacity (lenders use NOI for DSCR calculations), 4) Allows comparison between properties regardless of financing, and 5) Helps identify operational improvement opportunities. NOI is the single most important number in commercial real estate analysis.

NOI Builder

Gross Potential Rent

Vacancy Loss (-)

Other Income (+)

Operating Expenses (-)

Net Operating Income (NOI)

$75,000

Formula: (GPR - Vacancy + Other) - OpEx

💰 Understanding Your NOI

Positive NOI: Property generates income after operating expenses ✓
Higher NOI: More attractive to lenders and better cash flow potential.
Key Metric: NOI is used to calculate Cap Rate, DSCR, and property valuation.
Expense Ratios: Typical expense ratios are 35-45% of gross income for most property types.

💡 Pro Tip: Use actual expenses from the past 12 months when possible. Seller-provided 'pro forma' numbers are often optimistic. Always request T-12 (trailing twelve months) financial statements during due diligence.

What is Net Operating Income (NOI)?

Want a deeper dive? Read our Complete Guide to Building Your NOI.

Net Operating Income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. NOI is a before-tax figure, appearing on a property's income and cash flow statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. When this metric is used in other industries, it is referred to as "EBIT" (earnings before interest and taxes).

What's Included and Excluded?

The formula is straightforward: NOI = (Gross Operating Income + Other Income) - Operating Expenses. It's critical to understand what constitutes an operating expense. These are the day-to-day costs of running the property.

Included in OpEx: Property taxes, insurance, property management fees, utilities, repairs, maintenance, administrative costs, and supplies.
Excluded from OpEx: Mortgage principal and interest, capital expenditures (e.g., replacing a roof, HVAC system), income taxes, and depreciation. These are considered "below the line" costs related to financing and ownership structure, not the property's operational performance itself.

Why NOI Matters

NOI is arguably the most important number in a commercial property's financial statement. It is the basis for several other critical calculations. Lenders heavily rely on NOI to determine the Debt Service Coverage Ratio (DSCR), which assesses the property's ability to cover its loan payments. A higher, stable NOI makes it easier to secure financing on favorable terms. For investors, NOI is the numerator in the cap rate formula (Cap Rate = NOI / Property Value), which is used to value the property and compare it against other investment opportunities. A clear and accurate NOI calculation is the foundation of a sound real estate investment analysis.