NOI: the number behind everything
Net Operating Income (NOI) is a property's income after vacancy and operating expenses, but before the mortgage, income tax and depreciation. It is the building block behind both cap rate and DSCR.
NOI is the quiet workhorse of real estate analysis. You rarely quote it on its own, but cap rate, DSCR and most valuation work are built on top of it. Get NOI right and the rest of your numbers fall into place.
What is NOI?
Effective gross income is potential rent minus a vacancy allowance, plus any other income like laundry or parking. Subtract operating expenses and you have NOI: the annual income the property produces before financing and taxes.
What counts, and what does not
| In NOI (operating expenses) | Not in NOI |
|---|---|
| Property taxes, insurance | Mortgage / debt service |
| Maintenance, management | Depreciation |
| Utilities, vacancy allowance | Income taxes |
| Routine repairs | Capital improvements (CapEx) |
Excluding the mortgage is the key: it is exactly why NOI is the same whether you pay cash or borrow, which lets you compare any two properties fairly.
A worked example
A property collects $33,600 in annual rent. Allow 5% vacancy ($1,680) for effective gross income of $31,920. Operating expenses run $8,400 a year.
Why NOI is the foundation
Divide NOI by the price and you get the cap rate. Divide it by the annual debt payment and you get DSCR. Because it strips out financing and taxes, NOI is the cleanest measure of what a property earns, and the number every other metric leans on.
Frequently asked questions
Does NOI include the mortgage payment?
No. NOI is calculated before debt service. That is what makes it independent of how the property is financed, so cap rate and DSCR can both be built from it.
Are capital expenditures part of NOI?
No. Big-ticket replacements like a roof or HVAC are capital expenditures, treated separately from the routine maintenance that does count toward operating expenses. Many investors still set aside a CapEx reserve when underwriting.
What is the difference between NOI and cash flow?
NOI is income before the mortgage. Cash flow is what is left after the mortgage (and, in practice, after a CapEx reserve). Cash flow = NOI minus debt service.
How do I increase a property's NOI?
Raise income (rent, fees, other revenue) or cut operating expenses (appeal the tax assessment, shop insurance, reduce turnover). Because value equals NOI divided by cap rate, even small NOI gains can meaningfully raise the property's worth.