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How It Works
Net operating income subtracts operating expenses from gross operating income to show what a property earns before debt payments and income taxes. It is the single most important number in commercial real estate valuation.
Operating expenses include property management, insurance, maintenance, utilities, and property taxes. They do not include mortgage payments, capital expenditures, or depreciation.
Example Problem
An office building has $180,000 in gross operating income and $72,000 in operating expenses.
- NOI = $180,000 − $72,000 = $108,000
With a market cap rate of 7%, this property is worth $108,000 / 0.07 = $1,542,857.
Frequently Asked Questions
What expenses are included in NOI?
Operating expenses include property taxes, insurance, management fees, maintenance, and utilities. Mortgage payments, depreciation, and capital improvements are excluded. Typically, expenses run 35–50% of gross income.
Why is NOI important for property valuation?
NOI drives property value through the income approach: Value = NOI / Cap Rate. Increasing NOI by $10,000 at a 6% cap rate adds $166,667 to the property's value.
How can I increase NOI?
Raise rents to market levels, reduce vacancy through better marketing, add revenue streams (parking, laundry), and lower expenses by renegotiating service contracts or improving energy efficiency.
Related Calculators
- Capitalization Rate Calculator — convert NOI to property value.
- Gross Operating Income Calculator — compute income before expenses.
- Operating Expense Ratio Calculator — measure expense efficiency.
- Debt Coverage Ratio Calculator — check if NOI covers annual debt service.
- Vacancy & Credit Loss Calculator — estimate income reductions before computing NOI.
Reference: Gallinelli, Frank. 2004. What Every Real Estate Investor Needs to Know About Cash Flow. McGraw-Hill.