Net Operating Income (NOI)
A property's total income minus all operating expenses, before mortgage payments and taxes.
Definition
Net Operating Income (NOI) = Gross Rental Income − Vacancy Loss − Operating Expenses. It represents the property's earning power from operations, independent of how the investment is financed. NOI is the primary income metric used in commercial real estate valuation.
Operating expenses included in NOI: property management, property taxes, insurance, repairs and maintenance, utilities (if paid by owner), landscaping, and capital expenditure reserves. What's NOT included: mortgage payments (debt service) and income taxes. This makes NOI independent of financing structure.
Property value in commercial/multifamily real estate = NOI ÷ Cap Rate. This is why sophisticated investors focus intensely on growing NOI — every dollar of NOI increase is worth multiple dollars of property value. A $10,000 NOI increase capitalized at 5% creates $200,000 in equity.
Related Terms
Cap Rate
Capitalization rate — the ratio of a property's net operating income to its market value.
Cash Flow
The money left over each month after all property-related income and expenses are accounted for.
Debt Service
The total cash required to cover loan payments — both principal and interest — over a given period.
Vacancy Rate
The percentage of available rental units or space that is unoccupied at a given time.
Pro Forma
A financial projection document showing expected income, expenses, and returns for an investment property.
Value-Add
A property investment strategy that generates returns by improving the property to increase its income and value.
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