Full Definition
Net Operating Income is calculated as Gross Rental Income plus Other Income (vending, parking, etc.) minus Vacancy and Credit Loss minus Operating Expenses. It specifically excludes mortgage principal and interest, capital expenditures, depreciation, and income taxes. NOI is the core measure of a property's operating performance.
Example
A property with $500K gross rent, $25K other income, 5% vacancy, and $175K operating expenses has NOI of ($500K + $25K) × 0.95 - $175K = $323,750.
Why It Matters
NOI drives valuation. Cap rates are applied to NOI to determine property value. Small changes in NOI translate into large value changes.
Related Terms
Cap Rate (Capitalization Rate)
The ratio of a property's Net Operating Income to its purchase price, expressed as a percentage. The primary metric for comparing commercial real estate investments.
Operating Expenses (OpEx)
Recurring costs required to operate a property — taxes, insurance, maintenance, utilities, management.