Investment Concepts
What Is Net Operating Income in Real Estate?
Net Operating Income (NOI) is the annual income a real estate investment generates after subtracting all operating expenses but before deducting mortgage payments and income taxes. It is the central metric for valuing and comparing income-producing properties.
NOI: What's In and What's Out
INCLUDED in operating expenses (subtracted from EGI to get NOI): property taxes, hazard insurance, property management fees, maintenance and repairs, utilities paid by landlord, landscaping, trash removal, and reserves for replacement. EXCLUDED from NOI: mortgage interest payments, principal paydown, depreciation, and income taxes. These are financing and tax decisions — not property operations.
The formula: NOI = Effective Gross Income − Operating Expenses. Effective Gross Income = Gross Potential Rent − Vacancy and Credit Losses + Other Income.
NOI FAQ
Why is mortgage not included in NOI?
NOI measures the property's operating performance — independent of how it's financed. Two identical properties should have the same NOI regardless of whether one is purchased all-cash and one is 80% leveraged. This makes NOI a clean, comparable metric for property valuation.
How do investors use NOI to value property?
Property Value = NOI ÷ Cap Rate. If a property has $80,000 NOI and the market cap rate is 5%, its implied value is $1,600,000. If the cap rate rises to 6% (values fall), the same NOI implies a value of $1,333,333. Increasing NOI through rent increases directly increases value.
What is a good NOI for a rental property?
NOI isn't evaluated in isolation — it's expressed as a yield (cap rate) relative to purchase price. A 5% cap rate is standard in expensive coastal markets; 7–9% is common in Midwest cash flow markets. Compare a property's cap rate to market cap rates for similar properties, not to an absolute standard.
What is NOI used for besides valuation?
Lenders use NOI to underwrite commercial loans: Debt Service Coverage Ratio (DSCR) = NOI ÷ Annual Debt Service. Most commercial lenders require DSCR of 1.25 or higher, meaning NOI must be at least 125% of annual mortgage payments. DSCR directly affects how much you can borrow.
Related Resources
Definition Page Pillars
Use this term page as a concept layer, then return to pillar pages for full workflow review.