Net Operating Income (NOI)
A property's income after operating expenses but before debt service, income taxes, and capital costs.
Net operating income, or NOI, is the income a property produces after operating expenses but before mortgage payments, income taxes, and capital expenditures. Start with effective gross income, then subtract expenses like property taxes, insurance, management, utilities, and repairs.
NOI excludes the mortgage payment on purpose. It measures the property itself, independent of how a particular buyer finances it. That makes NOI the common language lenders and appraisers use to compare deals and set value through a cap rate.
Because so much rides on NOI, lenders scrutinize the expense assumptions behind it. Understated expenses inflate NOI and value, so underwriters often add back a market management fee and replacement reserves even when the current owner does not.
Formula
NOI = Effective Gross Income - Operating Expenses
Worked Example
A property collects $500,000 in effective gross income and spends $190,000 on operating expenses. NOI = 500,000 - 190,000 = $310,000. That figure then drives both value and loan sizing.
Why It Matters
NOI is the engine behind value, cap rate, DSCR, and debt yield. Move NOI up through higher rents or lower expenses and nearly every metric a lender cares about improves at the same time.
Related Terms
Related Programs and Tools
Frequently Asked Questions
Does NOI include the mortgage payment?
No. NOI is calculated before debt service, so it measures the property on its own, regardless of how any one buyer finances it.
Why do lenders adjust my NOI?
Underwriters often add a market management fee and replacement reserves, and they may normalize other expenses, so the NOI they use can be lower than the owner's figure.