Net Operating Income (NOI)
The annual income remaining after deducting all operating expenses from effective gross income, but before deducting debt service (mortgage payments) and income taxes. NOI is the numerator in the direct capitalization formula.
NOI = Effective Gross Income - Operating Expenses. Operating expenses include property taxes, insurance, management fees, maintenance, utilities (if owner-paid), reserves for replacement, and other recurring costs. NOI specifically excludes mortgage payments (principal and interest), income taxes, depreciation (accounting), and capital improvements. The distinction between operating expenses and capital expenditures is important — reserves for replacement approximate capital spending without lumping irregular large expenses into a single year. Accurate NOI estimation requires analysis of the property's actual operating history and comparison to market norms.
Related Terms
Effective Gross Income (EGI)
EGIPotential gross income minus vacancy and collection losses, plus other income (laundry, parking, late fees).
Capitalization Rate (Cap Rate)
Cap RateThe ratio of a property's net operating income to its market value or sale price, expressed as a percentage.
Income Approach
A valuation method that estimates a property's value based on the income it generates or is expected to generate.
Operating Expenses
The recurring costs of owning and operating an income-producing property, including property taxes, insurance, management, maintenance, utilities, and reserves for replacement.
Vacancy Rate
The percentage of available rental units or space that is unoccupied at a given time.
More in Income Approach
View allGross Rent Multiplier (GRM)
GRMThe ratio of a property's sale price to its gross monthly (or annual) rental income.
Discounted Cash Flow Analysis (DCF)
DCFA yield capitalization technique that estimates property value by projecting future cash flows (income minus expenses) over a holding period and discounting them to present value using a market-derived discount rate..
Market Rent
The rental income a property would most likely command on the open market, based on analysis of comparable rental properties in the area.
Reserves for Replacement
An annual allowance set aside from income to fund the periodic replacement of short-lived building components such as roof, HVAC, appliances, carpet, and exterior paint..