Net Operating Income - NOI

Net Operating Income (NOI)

Net Operating Income, commonly called NOI, is the income an investment property generates after normal operating expenses are deducted from its operating revenue.

NOI is widely used in real estate investment analysis because it helps show how the property itself is performing before financing and certain other costs are considered.

What Is Net Operating Income?

Net Operating Income measures the operating profitability of an income-producing property.

A simple NOI calculation compares the income generated by the property with the expenses required to operate and maintain it.

NOI is commonly used when analysing:

• Rental apartments
• Multifamily properties
• Commercial real estate
• Office buildings
• Retail properties
• Other income-producing real estate

NOI Formula

A common formula is:

NOI = Property Operating Income - Operating Expenses

For example, suppose a rental property generates:

• Annual rental income: 100,000
• Other property income: 5,000
• Operating expenses: 30,000

Total operating income would be:

100,000 + 5,000 = 105,000

The estimated NOI would be:

105,000 - 30,000 = 75,000

In this example, the property's annual Net Operating Income is 75,000.

What Income Can Be Included in NOI?

Depending on the property, operating income may include:

• Rental income
• Parking income
• Storage income
• Laundry income
• Service income
• Other recurring property-related income

Only income directly related to the property's normal operations is generally considered.

What Expenses Are Included in NOI?

Typical operating expenses may include:

• Property management
• Maintenance
• Repairs
• Insurance
• Property taxes where applicable
• Cleaning
• Common-area costs
• Utilities paid by the property owner
• Routine operating expenses

The exact expenses included can vary depending on the property and analysis method.

What Is Usually Excluded From NOI?

A basic NOI calculation generally excludes financing-related and non-operating costs such as:

• Mortgage principal
• Mortgage interest
• Income taxes
• Major capital improvements
• Property purchase costs

This is because NOI is intended to measure the property's operating performance independently of how the property is financed.

Why Is NOI Important?

NOI helps investors understand how much income a property generates from its normal operations.

It can be used to:

• Compare income-producing properties
• Calculate capitalization rate
• Review operating performance
• Analyse changes in income and expenses
• Support broader investment analysis

A higher NOI does not automatically mean a property is a better investment because purchase price, financing, location, risk and future costs also matter.

NOI and Cap Rate

NOI is an important part of the capitalization rate calculation.

A common cap rate formula is:

Cap Rate = NOI ÷ Property Value × 100

This means changes in NOI can directly affect the calculated cap rate when property value remains unchanged.

NOI and Cash Flow Are Different

NOI and cash flow are related, but they are not the same.

NOI generally measures property income after operating expenses but before financing costs.

Cash flow may also consider mortgage payments and other financial obligations.

Because of this, a property can have positive NOI but lower or even negative cash flow if financing costs are high.

What Can Increase NOI?

NOI may improve when:

• Rental income increases
• Vacancy decreases
• Additional property income is generated
• Operating expenses are reduced
• Property management becomes more efficient

However, decisions to increase income or reduce expenses should also consider property condition, tenant experience and long-term sustainability.

Important Information

NOI calculations can differ depending on which income and expenses are included.

Prozameen provides this glossary definition for general informational and educational purposes only.

Always review the assumptions used in any property financial analysis.