Net Operating Income (NOI) measures a property’s core profitability by subtracting operating expenses from gross revenue before financing and taxes. It isolates operational performance, enabling apples-to-apples comparisons and smarter investment decisions.
NOI matters to real estate investors assessing returns, lenders underwriting loans, property managers tracking performance, and analysts benchmarking assets.
NOI is the income a property generates from operations—rent, fees and services—minus all necessary operating expenses, excluding mortgage payments, depreciation and income taxes.
Unlike net income, NOI ignores financing and tax effects. Unlike EBITDA, it focuses solely on real estate operations and omits corporate overhead and depreciation. Unlike cash flow after financing, it excludes debt service.
Avoid underestimating vacancy losses, omitting sporadic maintenance costs and mixing capital projects with day-to-day expenses.
NOI stops before debt service; cash flow after financing reflects actual owner distributions post-mortgage.
EBITDA applies at the corporate level and may include non-real estate line items, while NOI is property-specific.
NOI is the numerator in the cap rate formula (Value=NOI/Cap Rate), driving valuation and yield comparisons.
Divide NOI by the market cap rate to estimate value. Higher NOI or lower cap rate increases valuation.
Lenders divide NOI by annual debt service to assess the borrower’s ability to cover mortgage payments. A DSCR above 1.2x is often required.
Publish NOI to showcase operational profitability and support pro formas, pitch decks and loan packages.
Residential: 50–60% NOI margin; Retail: 20–30%; Office: 30–45%, though markets vary.
Regional rents, labor costs and tax rates can swing NOI margins significantly—benchmark against comparable properties.
Scrutinize NOI if vacancy rates spike, expense lines jump unexpectedly or cap rates shift in recent deals.
Implement targeted rent increases, add ancillary services like storage or pet fees, and explore short-term leases.
Renegotiate vendor contracts, invest in energy-efficient upgrades and optimize staffing levels.
Enhance tenant retention with timely maintenance, lease incentives and community events.
Monthly NOI tracks trends, quarterly reviews guide strategy adjustments, and annual totals support valuations and tax filings.
Large portfolios may require monthly reporting on key assets and quarterly updates for weaker performers.
Sunset Apartments: 40 units at $1,300/mo, $100K annual vacancies, $150K operating expenses.
Gross Income: $1,300×40×12=$624,000 – Vacancies $100,000 = $524,000 – Expenses $150,000 = NOI $374,000.
Compare current NOI to acquisition projections, refinance thresholds and replacement cost to guide the hold/sell decision.
No. Debt service is excluded; NOI only reflects operating performance.
No. Reserves are a balance sheet item, not an operating expense.
Within 5–10% of actuals is acceptable for underwriting. Track variances monthly.
Mixed-use margins typically range 35–50%, depending on residential vs. commercial split.
NOI is the cornerstone metric for assessing property profitability, valuation and financing capacity.
Use spreadsheet pro formas, property management software and NOI calculators to streamline reporting.
Explore industry reports, local market analyses and advanced valuation guides to deepen your NOI expertise.
