NOI Calculator

Net operating income is the annual income a property generates from operations after deducting all operating expenses but before accounting for debt service, capital expenditures, depreciation, and income taxes. It is the single most important number in commercial real estate valuation because it directly determines property value through the cap rate and loan qualification through the DSCR.

When a broker quotes a price "at a 6.5% cap," they are dividing the property's NOI by 6.5% to arrive at the asking price. When a lender sizes a loan, they divide the NOI by the required DSCR to determine the maximum debt service, then work backward to the loan amount. NOI is the foundation of both equations.

Worked example: A 48-unit apartment building has the following financials:

The expense ratio is 35.4% ($420,000 / $1,185,000), which is typical for a well-managed multifamily property. At a 6.5% cap rate, this NOI implies a property value of $11,769,231.

Expense ratios vary by property type and lease structure. Here are typical ranges:

NNN (triple net) leases have the lowest expense ratios because tenants pay property taxes, insurance, and maintenance directly. Gross leases have the highest because the landlord covers all operating costs and factors them into the rent.

NOI measures operating performance only. These items are excluded by definition:

• Debt service. Mortgage principal and interest payments are financing costs, not operating costs. This is what makes NOI an "unlevered" metric.
• Capital expenditures. Roof replacements, HVAC systems, parking lot repaving, and other major improvements are not operating expenses. Some analysts deduct a replacement reserve as a proxy.
• Depreciation and amortization. These are accounting concepts, not cash expenses.
• Income taxes. The owner's tax liability depends on their personal situation, not the property's operations.
• Tenant improvements and leasing commissions. These are typically treated as capital costs, not operating expenses.

• Including debt service in expenses. Mortgage payments are not operating expenses. Including them double-counts financing costs when you later calculate DSCR.
• Forgetting vacancy and credit loss. Even stabilized properties have turnover. Using 100% occupancy overstates income and produces an unrealistic NOI.
• Using projected rent instead of actual collections. If the property has below-market leases in place, using market rent overstates current NOI. Distinguish between "in-place NOI" and "pro forma NOI."
• Excluding management fees for self-managed properties. Even if the owner manages the property themselves, a management fee (typically 3-5% of EGI) should be included to reflect the true cost of operations if a third party were to manage it.