What is NOI, and how do you calculate it?
Net operating income (NOI) is a commercial property’s annual income after operating expenses but before debt service, income taxes, and capital expenditures. Start with gross potential rent, subtract vacancy and credit loss to get effective gross income, then subtract operating expenses. NOI is the number cap rates and valuations are built on.
The build-up, line by line
| Gross potential rent | $250,000 |
| + Other income (parking, reimbursements) | $20,000 |
| − Vacancy & credit loss | −$20,000 |
| Effective gross income (EGI) | $250,000 |
| − Operating expenses | −$110,000 |
| Net operating income (NOI) | $140,000 |
Operating expenses are the costs of running the property: property taxes, insurance, utilities, management, repairs and maintenance, and administrative costs. Other income can include parking, laundry, storage, and expense reimbursements from tenants.
What NOI deliberately leaves out
This is where people trip up. NOI is financing-neutral on purpose, so it excludes:
- Debt service — your mortgage payment. NOI describes the property, not your loan.
- Income taxes — those depend on the owner, not the asset.
- Capital expenditures (capex) — roofs, HVAC, parking lots, and other big-ticket replacements sit below NOI.
- Tenant improvements & leasing commissions — costs to win and build out tenants.
Excluding these is exactly what makes NOI comparable across properties and buyers — and what makes it the clean numerator for a cap rate.
Why NOI is the number that matters
Value is NOI divided by a cap rate, so NOI does double duty: it drives valuation and it’s the starting point for your return. Because value moves as a multiple of NOI, even a small, durable increase in NOI — a rent bump, an expense cut — can move value substantially.