Net Operating Income (NOI): The Formula and What It Includes

The Short Answer

Net Operating Income (NOI) is Effective Gross Income (EGI) minus operating expenses. It is the income a property produces from operations before you touch debt service, capital expenditures, income tax, or depreciation. NOI is the single number that most directly drives value (through the cap rate) and financeability (through DSCR and debt yield), which is why lenders, buyers, and sellers all fight over how it is calculated before they fight over anything else.

The NOI Formula

The formula has two steps. First, get to Effective Gross Income:

• Gross Potential Rent (GPR) plus other income (parking, laundry, storage, fees)
• Minus vacancy and credit loss
• Equals Effective Gross Income (EGI)

Second, subtract operating expenses from EGI:

• NOI = Effective Gross Income (EGI) minus Operating Expenses

Operating expenses in this formula exclude debt service, capital expenditures, tenant improvements and leasing commissions, income tax, and depreciation. Those items affect cash flow and after-tax return, but they are not part of NOI. Mixing them in is the most common way NOI gets misstated, whether by accident or on purpose. It is worth sitting with why the formula draws the line where it does: NOI is designed to measure how the real estate itself performs, stripped of the financing decisions and tax position of whoever happens to own it today. A property does not become more or less productive because the owner refinanced at a better rate, and it should not look more or less productive on paper because of that either.

A Worked Example

Take a property with the following numbers:

• Gross Potential Rent: $1,200,000
• Other income: $60,000
• Vacancy and credit loss at 5%: a deduction of $63,000
• Effective Gross Income (EGI): $1,197,000
• Operating expenses: $480,000

NOI = $1,197,000 minus $480,000 = $717,000.

That $717,000 is what feeds a cap rate calculation to get value, and what feeds a debt service coverage ratio calculation to get loan sizing. Run your own numbers with our free NOI calculator before you take anyone's pro-forma at face value.

What NOI Does and Does Not Include

NOI includes the operating expenses a property needs to keep running and generating income:

• Property taxes
• Insurance
• Utilities
• Repairs and maintenance
• Property management fees
• Replacement reserves, usually

NOI excludes the items that relate to financing, ownership structure, or long-term capital rather than day-to-day operations:

• Debt service (principal and interest)
• Capital expenditures (capex)
• Tenant improvements and leasing commissions (TI/LC)
• Income tax
• Depreciation

That split matters because NOI is meant to represent the property's performance independent of how it is financed or owned. Two identical buildings with different mortgages have the same NOI and different cash flow. The same logic applies to capex and TI/LC: a roof replacement or a leasing commission paid to sign a new tenant are real costs, but they are lumpy, one-time, and tied to specific capital or leasing decisions rather than the routine cost of operating the property month to month. Keeping them out of NOI is what makes NOI comparable across properties and across time.

Why NOI Is the Number the Deal Pivots On

NOI is doing two jobs at once. It drives value, because price divided by cap rate (or NOI divided by cap rate, depending on which side of the equation you are solving) is how most commercial properties get valued. And it drives coverage, because DSCR and debt yield, the ratios lenders use to size a loan, are both built on NOI. If NOI moves, both the price a buyer will pay and the loan a lender will offer move with it. See how these connect in our explainers on cap rate and DSCR.

Because so much rides on one number, the honest question in any deal is never just "what is the NOI," it is "which NOI, and what did they include." Trailing twelve months (T-12) NOI reflects what the property has actually produced. Pro-forma NOI reflects what a broker or seller projects it will produce, often with new leases, rent bumps, or expense cuts baked in. The gap between the two is exactly where deals get overpriced. Aggressive vacancy assumptions, expense line items that quietly get removed, and one-time income treated as recurring are the usual levers. None of that is illegal, but all of it needs to be checked line by line rather than accepted from a rent roll.

This is also where AI underwriting tools earn their keep: pulling every income and expense line from a T-12, a rent roll, and a pro-forma into one comparable structure fast enough to catch the gap before you are the one holding it. That kind of check used to mean an analyst manually re-keying three different documents into a spreadsheet and hoping nothing got missed. It should not take that long, and it should not depend on catching a single line item buried on page four of an offering memorandum. That is what our AI underwriting copilot is built to do: extract the actual NOI components from whatever documents a broker sends over, flag where the pro-forma assumptions diverge from trailing performance, and hand you a number you can defend in a committee meeting. If you want to sanity-check a deal right now, start with the free NOI calculator.