Net Operating Income (NOI)
Net operating income is a property's effective gross income minus its operating expenses, calculated before debt service, capital expenditures, income taxes, and depreciation.
NOI = Effective Gross Income - Operating Expenses
What NOI measures
Net operating income is the cash a property produces from operations, before any decision about how it is financed or owned. Because it excludes debt service, NOI describes the asset rather than the deal, which is why it sits underneath DSCR, debt yield, and cap rate alike. An error in NOI travels into all three.
How it is calculated
NOI = Effective Gross Income - Operating Expenses
Effective gross income starts with scheduled base rent from the rent roll, adds expense recoveries and other income such as parking, storage, and amenity fees, then subtracts vacancy, credit loss, and concessions.
What belongs above the line
Operating expenses are the recurring costs of running the property: property taxes, insurance, utilities not billed back, repairs and maintenance, contract services, payroll for on-site staff, marketing, administrative costs, and a management fee.
The management fee belongs in the calculation even when the owner self-manages. A lender is underwriting the property, and a future owner would pay someone to run it.
What belongs below the line
- Debt service. Principal and interest are a financing decision, not an operating cost.
- Capital expenditures. Roof replacements and unit renovations are capital, though most credit policies require a replacement reserve above the line so recurring capital needs are not ignored.
- Depreciation and amortization. Non-cash.
- Income taxes and owner-level costs. These belong to the owner rather than the asset.
A worked example
A 40-unit property has $648,000 of scheduled base rent, $18,000 of other income, and a 5 percent vacancy and credit loss factor, giving effective gross income of $612,000. Operating expenses of $248,000 include taxes, insurance, utilities, maintenance, a 4 percent management fee, and a $250 per unit replacement reserve.
$612,000 minus $248,000 is $364,000 of NOI.
Where borrower NOI overstates reality
The recurring gaps between a borrower's NOI and a lender's are predictable: no management fee, no replacement reserve, a vacancy factor below what the submarket supports, one-time income treated as recurring, expenses shown on a partial year and annualized from a seasonally light period, and taxes held at the current assessment when a sale will trigger a reassessment.
Each is defensible in isolation and material in combination. A property whose NOI moves 10 percent moves DSCR, debt yield, and value by roughly the same proportion.