Net Operating Income (NOI) measures the profitability of an income property from its operations alone. It is calculated by subtracting operating expenses from operating revenue, deliberately excluding financing costs (debt service), capital expenditures, depreciation, and income taxes. Because it isolates operating performance from how the property is financed or taxed, NOI is the foundation for valuation (via cap rate) and lender metrics (via DSCR).
NOI = Operating Income − Operating Expenses
What goes into NOI
Operating income includes base rent, expense recoveries (CAM/NNN), parking, and other property revenue. Operating expenses include property taxes, insurance, utilities, maintenance, and management fees.
- Included: rental income, expense recoveries, ancillary income
- Included as expense: taxes, insurance, utilities, repairs, management
- Excluded: mortgage/debt service, capital expenditures, depreciation, income tax
Why NOI matters
NOI drives two of the most important numbers in commercial real estate. Divide NOI by a cap rate to estimate value; divide NOI by debt service to get DSCR. Because both flow from NOI, an accurate, consistent NOI is essential to valuation and financing.
A property generates $1,000,000 in operating income and incurs $400,000 in operating expenses. Its NOI is $600,000. At a 6% cap rate that implies a value of roughly $10,000,000.