What Is Net Operating Income?
Net operating income is a property's total income from rent and other sources, minus operating expenses, before accounting for debt service (mortgage payments).
Advanced Explanation
NOI = effective gross income (potential rent and other income, less vacancy and credit loss) minus operating expenses such as taxes, insurance, management, repairs and maintenance, and owner-paid utilities. It excludes debt service, depreciation and income taxes, and under many conventions capital expenditures and leasing costs - which is why reserves and CapEx are often shown below NOI.
Formula
NOI = Gross Rental Income − Operating Expenses
Example
A property with $30,000 in annual rental income and $10,500 in operating expenses has an NOI of $19,500.
Why It Matters
NOI is the input used to calculate cap rate and is a core measure of a rental property's profitability independent of financing.
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