Glossary term
Net Operating Income (NOI)
Net operating income is the money a property earns after operating expenses but before loan payments, income taxes and major capital work.
NOI is the core measure of a property's earning power. The formula is effective gross income minus operating expenses. Effective gross income is the rent you actually collect plus other income such as fees and laundry, after vacancy and bad debt. Operating expenses include payroll, repairs, utilities, insurance, property taxes and management fees.
NOI leaves out the mortgage, depreciation, income taxes and large capital projects such as a new roof. That keeps it focused on how the property itself performs, which is why lenders and buyers use it to set value and test debt.
Value moves with NOI. If a property is priced at a 6 percent cap rate, each extra dollar of NOI adds about $16.67 of value. That is why owners look for ways to raise income and trim expenses without hurting the resident experience.
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