What Is NOI?
Net Operating Income (NOI) is a property's annual income after operating expenses but before mortgage payments and taxes. It's the single most important number in commercial real estate finance.
What's Included in NOI
Income Side (Effective Gross Income)
- Gross scheduled rents (all units at market rate)
- Less: Vacancy and credit loss (typically 5–10%)
- Plus: Other income (laundry, parking, late fees, storage)
Operating Expenses (subtract these)
- Property taxes
- Insurance
- Property management (8–12% of rents)
- Repairs and maintenance
- Utilities (if landlord-paid)
- HOA / association dues
- Landscaping, snow removal, trash
- Advertising and leasing costs
What Is NOT in NOI
Why NOI Matters
For Cap Rate: Cap Rate = NOI / Price. Higher NOI = higher value.
For DSCR: DSCR = NOI / Annual Debt Service. Lenders require 1.0+ (usually 1.20+).
For Valuation: Appraisers value commercial and multifamily properties using NOI ÷ Market Cap Rate.
For Cash Flow: Cash Flow = NOI − Debt Service (mortgage payments).
Stabilized vs. Actual NOI
Actual NOI uses current rents and occupancy — what the property is generating today.
Stabilized / Pro Forma NOI assumes full occupancy and market rents — useful for value-add deals but requires verification. Lenders typically underwrite to actual, not pro forma.