Net Operating Income (NOI) is a fundamental metric used in real estate investment analysis to determine the profitability of income-generating properties. It represents all revenue from the property minus all reasonably necessary operating expenses. Critically, NOI is a "pre-tax" figure that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization.
The NOI Formula
NOI = (Gross Potential Income + Other Income – Vacancy & Credit Losses) – Operating Expenses
Operating Expenses Included in NOI
Property Taxes: Annual assessments by the local government.
Insurance: Premiums for property and liability coverage.
Management Fees: Costs for professional property management services.
Maintenance and Repairs: Routine costs to keep the property in habitable condition.
Utilities: Water, sewer, trash, and common area electricity (if paid by the owner).
A common mistake is including Debt Service (mortgage payments) in the NOI calculation. NOI is property-specific, not owner-specific. By excluding debt, investors can compare different properties regardless of how they are financed. Other exclusions include Income Taxes and Capital Expenditures (large, one-time renovations like a new roof).
Real-World Example Calculation
Imagine a 4-unit apartment building where each unit rents for $2,000/month:
Potential Rental Income: $2,000 x 4 x 12 = $96,000