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.