Net Operating Income (NOI)
Net operating income (NOI) is the income a property produces after operating expenses, before loan payments, income taxes, depreciation and capital spending. It is the main measure of a property's earning power and the starting point for its value, its cap rate and the size of loan it can support.
How to calculate net operating income
Net operating income = Effective gross income − Operating expenses
Example: A property collects $1,500,000 in rent and other income after vacancy and credit loss. Operating expenses for taxes, insurance, utilities, repairs, management and reserves total $600,000. Its net operating income is $1,500,000 − $600,000, or $900,000.
Why net operating income matters
Almost every major commercial real estate metric starts with net operating income. Cap rates divide it by value, the debt service coverage ratio divides it by loan payments, and debt yield divides it by the loan amount. An error in net operating income flows into every one of those numbers.
Because so much depends on it, underwriters rebuild net operating income themselves instead of accepting the seller's or borrower's figure. They check income against the rent roll and bank records, add a vacancy allowance, reset taxes and insurance at what a new owner will pay, and include replacement reserves even when the seller left them out.
Net Operating Income vs. Cash Flow
Net operating income stops before debt service and capital spending. Cash flow subtracts those costs and shows what the owner actually receives. Two identical properties have the same net operating income, but the one with the larger loan has lower cash flow.
How Smart Capital Center handles net operating income
Smart Capital Center's AI agents build net operating income from the rent roll and operating statements, reset expenses such as taxes and insurance to current levels, and show the source behind every line. Analysts adjust any assumption before the model is used.
Frequently asked questions
What expenses are included in net operating income?
Net operating income subtracts the costs of running the property: property taxes, insurance, utilities, repairs and maintenance, property management, payroll, marketing and administrative costs. Most underwriters also subtract an allowance for replacement reserves. Loan payments, income taxes, depreciation and major capital improvements are not included.
Is net operating income the same as profit?
No. Net operating income measures what the property itself earns before financing and taxes. The owner's profit depends on how the property is financed, what capital spending it needs and the owner's tax position. Two owners of identical properties can have the same net operating income and very different profits.
How does net operating income affect property value?
Commercial properties are usually valued by dividing net operating income by a market cap rate. At a 6 percent cap rate, every $1 of added net operating income adds about $16.67 of value, and every $1 of lost income takes the same amount away. That is why owners focus so closely on growing income and controlling expenses.