Investing metrics
Net operating income (NOI)
Net operating income is effective property income minus normalized property operating expenses, before debt service and owner-level income taxes.
Glossary
Investing metrics
What is net operating income?
Primary references on this page:
·
IRS Publication 527: Rental income and expense recordsNOI feeds cap rate, DSCR, and debt yield, so inconsistent classifications can distort several metrics at once. Normalize vacancy, management, repairs, taxes, insurance, utilities, and reserves as required by the analysis, and clearly state whether a replacement reserve is included.
A property-level NOI bridge
Suppose annual scheduled rent is $30,000, vacancy and credit loss are $1,500, other property income is $600, and recurring operating expenses total $10,100. Effective income is $29,100 and NOI is $19,000. The expense file should show the property taxes, insurance, management, repairs, owner-paid utilities, and other recurring operations that make up the $10,100 rather than presenting one unsupported plug.
Mortgage principal and interest are excluded because NOI measures the property before its capital structure. Income tax and depreciation are excluded because they answer owner and tax questions. A major roof replacement is generally analyzed as capital spending rather than a recurring operating line, but the underwriting still needs a reserve or capital plan so NOI does not imply that the roof is free.
What NOI can and cannot support
NOI feeds cap-rate, value, and debt-coverage analysis, so small classification changes can produce large downstream differences. A buyer should reconcile seller-provided NOI to leases, rent roll, ledgers, bills, and bank evidence, then build an independent forward case with stated assumptions.
NOI is not cash flow after the mortgage, taxable income, or money available for an owner draw. It also is not standardized identically in every lender, appraisal, or reporting context. State the definition beside the number whenever another party will rely on it.