What is Net Operating Income (NOI) in Real Estate?

Net Operating Income (NOI) is a core metric in commercial real estate used to evaluate a property’s income-producing potential. It gives you a clear look at how much income a property generates from day-to-day operations after subtracting routine expenses, but before factoring in debt payments, taxes, or depreciation.

Whether you’re sizing up a new investment or keeping tabs on one you already own, understanding how NOI works can help you make sharper, more strategic decisions.

What is NOI: Net Operating Income (NOI) Defined

Net Operating Income (NOI) is the income a real estate asset produces after subtracting all standard operating expenses. It measures how well a property performs on its own, without the influence of loan payments, taxes, or major capital improvements.

The formula for NOI is:

NOI = Gross Operating Income – Operating Expenses

This calculation is typically done annually and leaves out non-operating items like depreciation, debt service, and large-scale upgrades.

What Counts as Revenue?

Gross Operating Income (GOI) includes all recurring revenue sources tied to the property, such as:

• Base rent
• Parking fees
• Storage fees
• Laundry or vending machine income
• Amenity or service fees

To get an accurate GOI, subtract vacancy and credit losses, since uncollected rent reduces actual cash flow.

What Counts as Operating Expenses?

Operating expenses are the ongoing costs needed to maintain and run the property. These include:

• Property taxes
• Insurance
• Utilities (for common areas or landlord-paid units)
• Property management fees
• Maintenance and repairs
• Cleaning, landscaping, or janitorial services
• Legal, accounting, and admin costs related to operations

Note: Capital improvements (like a roof replacement), loan payments, and depreciation are excluded from operating expenses—and from NOI.

Example: Calculating Net Operating Income

Let’s say you own a 10-unit apartment building with the following income and expenses:

Annual Income

• Rental income: $240,000
• Parking and laundry: $10,000
• Less vacancy (5%): –$12,500
• Gross Operating Income: $237,500

Operating Expenses

• Maintenance and repairs: $20,000
• Taxes: $15,000
• Insurance: $5,000
• Property management: $12,500
• Total Expenses: $52,500

Net Operating Income = $237,500 – $52,500 = $185,000

Why NOI Matters

NOI is more than just a basic performance metric, it’s a powerful decision-making tool for investors, lenders, and analysts. Here’s why it’s important:

• Investment valuation: NOI helps investors estimate property value using the capitalization rate (cap rate). Cap Rate = NOI ÷ Property Value
• Loan underwriting: Lenders rely on NOI to determine whether a property can generate enough cash flow to cover its debt obligations using the debt service coverage ratio (DSCR). Lenders prefer NOI over gross revenue because it better reflects a property’s ability to cover debt and support long-term financing.
• Performance monitoring: Investors use NOI to track profitability over time, identify trends, and uncover operational inefficiencies.

NOI vs. Net Income

While they sound similar, NOI and net income measure different things. Though they sound similar, these terms aren’t interchangeable. NOI focuses strictly on property operations, while net income reflects the investor’s actual bottom line after financing, depreciation, amortization, and taxes are included.

NOI reflects the property’s performance. Net income reflects the investor’s actual profit after financing and taxes.

How to Improve NOI

Increasing NOI typically means boosting income, reducing costs - or ideally, both. Here’s how:

1. Increase Income

• Raise rents (in line with local market trends)
• Add new income streams like storage rentals, pet fees, or smart home tech upgrades
• Improve tenant satisfaction and retention to reduce turnover and vacancies

2. Reduce Operating Costs

• Invest in energy-efficient systems and regular utility audits to decrease inefficiencies and cut utility bills
• Renegotiate service contracts for better rates
• Automate property management with digital tools (smart thermostats, digital access systems)

Regular NOI reviews can help you align operations with your investment goals, especially when market conditions shift.

NOI and Today’s Market Conditions

With today’s higher interest rates, rising operational costs, and tighter lending conditions, NOI plays a critical role in investment decisions in 2025. It provides a clear snapshot of performance that’s not distorted by financing terms or one-time expenses. With investors placing greater emphasis on operational efficiency and income stability, NOI has become a go-to benchmark for separating strong performers from riskier assets.

What is a Good NOI?

Properties with healthy or growing NOI are better positioned to weather market turbulence and stand out to lenders and investors alike. Conversely, negative or declining NOI may signal higher risk or inefficiencies that need to be addressed.

A “good” NOI in real estate often depends on the asset type, location, and market conditions, but the focus should be on consistency and potential for growth. Investors typically look for a stable NOI that supports their target cap rate and aligns with long-term performance goals.

If you’re evaluating an opportunity, consider not just the current NOI, but how it might improve over time through rent growth, expense control, or repositioning. In that sense, NOI becomes a practical starting point for forecasting return on investment.

Why NOI Matters: A Practical Tool for Smarter CRE Decisions

Net operating income remains one of the most useful metrics for evaluating commercial properties. It strips things down to the essentials: how much your asset earns versus what it costs to keep it running. Whether you’re comparing investment opportunities, tracking performance, or preparing for a sale, understanding NOI gives you the clarity and confidence to move forward strategically.

Looking for better CRE insights? Crexi Intelligence equips investors, brokers, and owners with powerful tools and data to analyze properties, compare deals, and stay ahead in a competitive landscape.