Net Operating Income (NOI)

Net operating income (NOI) measures the profitability of an income-producing property. It equals all property-generated revenue minus the operating expenses required to run the property. NOI is a before-tax figure and excludes financing costs and certain nonrecurring or accounting items.

What NOI Includes and Excludes

Includes:
* Rental income
* Parking, storage, and other tenant fees
* On-site vending, laundry, and similar ancillary income
* Regular operating expenses such as:
* Property taxes and insurance
* Property management fees
* Repairs, maintenance, and janitorial services
* Utilities paid by the owner

Excludes:
* Mortgage principal and interest payments
* Capital expenditures (large, nonrecurring repairs or replacements)
* Depreciation and amortization
* Income taxes

Formula

NOI = Total property revenue − Operating expenses

Example

Condominium rental example:
* Revenues:
* Rental income: $20,000
* Parking fees: $5,000
* Laundry machines: $1,000
Total revenue = $26,000
* Operating expenses:
* Property management: $1,000
* Property taxes: $5,000
* Repairs and maintenance: $3,000
* Insurance: $1,000
Total operating expenses = $10,000

NOI = $26,000 − $10,000 = $16,000

Another quick example: $120,000 revenue − $80,000 operating expenses = $40,000 NOI. If expenses exceed revenue, the result is a net operating loss (NOL).

Why NOI Matters

• Valuation and comparison: NOI is used to calculate the capitalization rate (cap rate), which is NOI divided by the property’s value or purchase price. The cap rate (expressed as a percentage) helps compare potential returns across properties.
• Underwriting and lending: Lenders use NOI to evaluate a property’s ability to generate enough income to cover operating expenses and debt service. NOI feeds into ratios such as the debt coverage ratio (DCR).
• Performance metrics: NOI is also a building block for metrics like cash return on investment, net income multiplier, and total return.

NOI vs. Other Measures

• Gross operating income: Gross operating income is total potential income before expenses. NOI = Gross operating income − Operating expenses.
• EBIT (earnings before interest and taxes): In other industries, a comparable concept to NOI is EBIT, which similarly excludes interest and taxes.

Interpreting NOI

NOI itself is an absolute dollar figure, not a percentage. To gauge performance relative to value, divide NOI by the property price or market value to get a percentage (the cap rate). Generally, a higher NOI or higher NOI-to-price percentage indicates a more profitable investment, all else being equal.

Conclusion

NOI is a fundamental measure of an income-property’s operating profitability. By isolating recurring revenue and operating costs—while excluding financing and nonrecurring items—NOI provides a clear basis for valuation, comparison, and lending decisions.