What is Net Operating Income?
Net Operating Income (NOI) is the annual income a property generates after all operating expenses are deducted, but before mortgage payments, income taxes, or depreciation. It is the single most important number in commercial and residential income property analysis because it feeds directly into cap rate, property valuation, and DSCR calculations. NOI starts with gross potential rental income, then subtracts vacancy and credit loss (typically 5–10% of gross rents), and all operating expenses: property taxes, insurance, routine maintenance, capital reserves, property management fees, utilities paid by the landlord, and any HOA dues. The deliberate exclusion of debt service from NOI is what makes it a universal benchmark — investors can compare properties regardless of how they are financed. Maximizing NOI is the primary lever for growing the value of income-producing real estate: every $1,000 increase in annual NOI increases property value by roughly $14,000–$20,000 in a 5–7% cap rate environment.