NOI is the most important financial number in commercial real estate. It drives cap rate, drives valuation, drives the lender's decision, and drives your returns. If cap rate is the ruler, NOI is what's being measured.

And it's also the number sellers and brokers most often exaggerate. Learning to calculate NOI correctly — and to recalculate what a broker hands you — is the single highest-leverage financial skill in CRE.

The formula

That's the short version. The expanded version walks through it step by step:

  Gross Potential Income (GPI)
−  Vacancy & Credit Loss
+  Other Income
=  Effective Gross Income (EGI)
−  Operating Expenses (OpEx)
=  Net Operating Income (NOI)

Let's walk through each line.

Line 1: Gross Potential Income

The total rent you'd collect if every square foot were leased at market rent with zero vacancy. This is a theoretical ceiling, not reality.

Example. A 10-unit apartment building with every unit renting at $1,500/month = $180,000/year GPI.

For commercial properties, GPI is the sum of each tenant's annual rent at the current lease rate, calculated from the rent roll. For multifamily with vacant units, you use the market rent for the vacant unit, not zero.

Line 2: Vacancy & Credit Loss

Some portion of GPI won't actually be collected. Underwrite a vacancy factor based on the submarket and asset class:

Multifamily: 5–8% is standard for Class A/B, 8–12% for Class C
Retail / industrial: 5–10% typical, higher if the market is soft
Office: 10–20% in 2026, depending on submarket and lease expirations

Plus credit loss — rent that tenants don't pay at all, often 1–2% of GPI. Many underwriters combine vacancy and credit loss into a single 5–10% allowance.

Line 3: Other Income

Income from sources other than base rent:

Parking fees
Laundry (multifamily)
Late fees
Pet rent
CAM reimbursements (retail/office)
Vending machines
Storage rental
Application fees

On a well-run multifamily property, other income can add 3–8% on top of base rent. On a NNN retail property, "other income" is usually CAM reimbursements, which you need to think carefully about (more on this in the next lesson).

Line 4: Effective Gross Income (EGI)

GPI − Vacancy + Other Income = EGI. This is the realistic top line — the actual cash flowing in.

Line 5: Operating Expenses (the big one)

Here's where NOI calculations go off the rails. Operating expenses are every dollar needed to run the property and keep it generating income. The standard categories:

Fixed expenses

Property taxes — usually the biggest expense. Reassessment after sale can spike this by 20–50%.
Insurance — property & liability. In Florida, rising wildly due to hurricane exposure.
Management fee — even if you self-manage, always underwrite a market management fee (3–10% of EGI depending on asset class). Otherwise you're pretending labor is free.

Variable expenses

Utilities — electric, water, sewer, gas, trash (what's not paid by tenants)
Repairs & maintenance — ongoing R&M, not capital improvements
Landscaping / snow removal
Pest control
Turnover costs — paint, carpet, cleaning between tenants (multifamily)
Marketing / leasing fees
Legal & professional — accounting, legal, minor consulting

Reserves

Capital expenditure reserves (CapEx reserves) — money set aside for roof replacements, parking lot resurfacing, HVAC replacements. Usually $250–$400 per unit per year for multifamily, or $0.10–$0.30 per sq ft per year for commercial.

What is NOT in NOI

This is just as important as what IS in NOI. The following are explicitly excluded:

Debt service (mortgage payments) — NOI is pre-leverage
Income taxes — NOI is pre-tax
Depreciation — NOI is cash-based, not GAAP
Amortization — same
Capital improvements — large one-time items like roof replacement
Tenant improvements & leasing commissions (TI/LC) — though some underwriters include these as below-NOI items

If you see any of these subtracted from a "NOI" number, the broker is using a non-standard definition — and almost always the NOI is being understated to look like it's been carefully calculated, or the reverse.

The seven places sellers inflate NOI

Every broker OM has one or more of these. Your job is to spot them.

1. Vacancy assumption is too low

OM says 3% vacancy when the submarket runs 10%. Recalculate with realistic vacancy.

2. Management fee is excluded

OM says "owner-managed" and shows zero management expense. Add a 4–8% management fee regardless.

3. Property taxes are from the current owner

Taxes will reassess when you buy. Look up the millage rate and calculate post-sale taxes on your purchase price, not the current owner's low basis.

4. Insurance is from an old policy

Florida insurance has doubled or tripled in many submarkets. Get a real insurance quote before trusting the number.

5. Repairs & maintenance is too low

A property running at "2% of EGI" for R&M is lying. Normal is 5–10% depending on age and asset class.

6. CapEx reserves are excluded

$0 reserves means the broker is pretending the building will never need a new roof. Add $250/unit/year minimum for multifamily, $0.20/sq ft for commercial.

7. "Other income" is aspirational

"Projected laundry income" or "potential parking revenue" shouldn't count until it exists.

The rule: Recalculate every line item yourself. Don't trust the OM. Your NOI will almost always be 10–20% lower than the broker's NOI, and that's exactly the number you should base your offer on.

A full worked example

Let's walk through a small retail strip center:

Gross Potential Income:
  Tenant A (anchor):     $60,000
  Tenant B (dry cleaner): $30,000
  Tenant C (pizza shop):  $24,000
  Tenant D (vacant):      $24,000 (market rent)
  Total GPI:             $138,000

− Vacancy (8%):         −$11,040
+ CAM reimbursements:   +$12,000
= Effective Gross Income: $138,960

− Operating Expenses:
  Property taxes:        $14,000
  Insurance:              $6,500
  Management (5% EGI):    $6,948
  R&M:                    $4,500
  Landscaping:            $2,400
  Utilities:              $3,200
  Legal/professional:     $1,500
  CapEx reserves:         $3,000
  Total OpEx:            $42,048

= NOI:                    $96,912

If this property is listed at $1,500,000, the cap rate is $96,912 / $1,500,000 = 6.46%.

If the broker's OM shows NOI of $115,000 (inflated by a low vacancy assumption, zero management fee, and no reserves), the same $1,500,000 listing looks like a 7.67% cap rate. Big difference for the same property.

What to take away

NOI = Effective Gross Income − Operating Expenses.
Effective Gross Income includes vacancy and credit loss deductions plus other income.
Operating Expenses include fixed, variable, and reserves. Always include a management fee, even when self-managing.
NOI excludes debt service, income taxes, depreciation, capital improvements, and TI/LC.
Broker OMs almost always inflate NOI — recalculate every line item yourself.
Your NOI is usually 10–20% lower than the broker's NOI, and that's the correct number.

Next lesson: the cash-on-cash return — how NOI and leverage combine to produce the number you actually care about.

Net Operating Income (NOI) — The Number That Drives Everything