NOI (Net Operating Income)
NOI Formula
NOI Calculation Example
| Line Item | Annual Amount |
|---|---|
| Gross Potential Rent | $500,000 |
| Other Income (parking, laundry, fees) | $25,000 |
| Less: Vacancy & Credit Loss (5%) | −$26,250 |
| Effective Gross Income | $498,750 |
| Property Management (8%) | −$39,900 |
| Property Taxes | −$45,000 |
| Insurance | −$12,000 |
| Maintenance & Repairs | −$30,000 |
| Utilities (owner-paid) | −$18,000 |
| NOI | $353,850 |
What’s Included (and Excluded) in NOI
| Category | Included in NOI | Excluded from NOI |
|---|---|---|
| Income | Rent, parking, laundry, late fees | Loan proceeds, asset sales |
| Expenses | Property tax, insurance, management, maintenance, utilities | Mortgage payments, capital expenditures, income taxes, depreciation |
| Rationale | Day-to-day property operations | Financing and ownership-level decisions |
Why NOI Matters
Property valuation. In commercial real estate, property values are derived from NOI using the cap rate. Property Value = NOI ÷ Cap Rate. If NOI goes up, the property is worth more — even if nothing else changes.
Lender analysis. Banks use NOI to calculate the debt service coverage ratio (DSCR), which determines how much they’ll lend. A property with strong, stable NOI gets better financing terms.
Comparing properties. Since NOI excludes financing, it lets you compare the operating performance of two properties regardless of how each is financed. It’s the real estate equivalent of EBITDA in corporate finance.
Identifying value-add opportunities. If you can increase rents, reduce vacancies, or cut operating expenses, NOI grows — and property value follows. This is the fundamental thesis behind value-add real estate investing.
NOI vs. Cash Flow
NOI is not the same as cash flow. To get actual cash flow, you subtract debt service (mortgage payments) and capital expenditures from NOI. This gives you the cash-on-cash return — the actual money hitting your bank account.
Key Takeaways
- NOI = Total Income − Operating Expenses, excluding debt service, capex, and taxes.
- It’s the foundation for property valuation (via cap rate) and lending decisions (via DSCR).
- NOI lets you compare properties on operating performance alone, regardless of financing structure.
- Always verify NOI with actual data — never rely solely on seller pro forma numbers.
- Growing NOI is the primary lever for creating value in commercial real estate.
Frequently Asked Questions
What is a good NOI for a rental property?
There’s no universal “good” NOI — it depends on the property’s size, location, and type. What matters is the NOI margin (NOI ÷ Gross Income) and how it translates to a competitive cap rate. Most well-run multifamily properties achieve NOI margins of 55-70%.
Does NOI include mortgage payments?
No. NOI deliberately excludes mortgage payments (debt service) so you can evaluate the property’s operating performance independently of how it’s financed. This makes it useful for comparing properties with different financing structures.
How is NOI different from EBITDA?
EBITDA is a corporate finance metric that excludes interest, taxes, depreciation, and amortization. NOI is the real estate equivalent — it excludes financing costs and non-cash items. The concept is the same: isolate operating performance from capital structure decisions.
Can NOI be negative?
Yes. If operating expenses exceed rental income — due to high vacancy, under-market rents, or excessive costs — NOI turns negative. This means the property loses money at the operating level, before you even consider mortgage payments.
How do you increase NOI?
Two levers: increase income or decrease expenses. On the income side, raise rents to market, reduce vacancy, or add revenue streams (parking, storage, laundry). On the expense side, renegotiate contracts, improve energy efficiency, or bring property management in-house.