What to Know About Net Operating Income (NOI)

In commercial real estate, few numbers carry more weight than Net Operating Income (NOI). It’s the heartbeat of a property’s financial health and the figure investors, lenders, and buyers look at first to judge performance. In other words, NOI isn’t just a number—it’s the lens through which opportunity and risk are judged.

Why NOI Matters

• Valuation: Property values are often calculated by dividing NOI by the market cap rate. A stronger NOI translates directly into a higher appraised value.
• Financing: Lenders evaluate debt service coverage ratios (DSCR) using NOI, determining how much a property can safely borrow.
• Performance Tracking: Investors use NOI to compare properties across markets and track operational efficiency.

How to Calculate NOI

The formula is straight forward:

Gross Income – Operating Expenses = NOI

But what counts as gross income? And what’s considered an operating expense? Here are some examples of what is included in these two categories, including items that are commonly overlooked.

Gross Income includes all revenue collected from the property:

• Rent collected. Be sure to account for expected vacancies and tenants who fail to pay.
• Other income streams
  • Parking fees
  • Storage rentals
  • Vending & laundry machines
  • Pet fees
• Concessions
  • Discounts / Move-in Specials. These may artificially inflate income if it’s not subtracted from the gross income

Operating Expenses are the costs associated with running the property:

• Maintenance & repairs. Routine and preventative maintenance costs (plumbing, landscaping, snow removal, pest control) are often underestimated or ignored
• Property management fees: even if self-managed, a management fee should be factored in to reflect market-standard expenses
• Utilities paid by the owner, including water, sewer, trash, or heating costs
• Property insurance premiums
• Property taxes
• HOA or condo fees
• Licenses & permits
• Legal & accounting fees

*These are not complete lists. Consult your accountant for more information.

What’s NOT part of NOI (but people sometimes include by mistake):

• Mortgage payments / debt service: these are financing costs, not operational expenses
• Depreciation & amortization: these are accounting entries, not cash expenses
• Owner’s income taxes: Personal tax liabilities are not part of NOI.
• Capital expenditures: big-ticket items like a new roof, HVAC replacement, or structural improvements are considered long-term investments to increase the value of the property, not day-to-day expenses for the purposes of NOI. (Keep track of these expenditures separately for tax purposes.)

How Investors Use NOI

• Acquisition: Before buying, investors project NOI to see if the deal pencils out at the asking price.
• Operations: Owners monitor NOI to identify whether expenses are creeping up or income is lagging.
• Disposition: A well-documented, growing NOI makes a property more attractive when it’s time to sell.

How to Boost NOI the Right Way

Since every dollar of NOI affects valuation, investors are always looking for ways to improve it. The strategies usually fall into two categories:

• Increase income
• Raise rents to market levels
• Add revenue streams (parking, vending, storage, amenities)
• Reduce vacancy with strong tenant retention programs
• Control expenses
• Negotiate vendor contracts
• Implement energy-efficient upgrades
• Streamline property management processes

The key is sustainability—quick fixes or cutting corners can inflate NOI in the short term but hurt the property’s long-term viability.

The Takeaway

Net Operating Income is more than just math on a spreadsheet. It’s the true measure of a property’s earning power, the starting point for valuation, and the standard by which lenders and investors gauge risk. Whether you’re analyzing your first property or managing a portfolio, understanding and protecting NOI is central to building long-term wealth in real estate.