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Housing Unpacked
Glossary

Net operating incomeNOI

A property's annual income after vacancy and operating expenses but before debt payments and income taxes; the number most other real estate math starts from.

Net operating income is what a building earns in a year from rent and other income, after subtracting vacancy and credit loss and after paying operating expenses such as property taxes, insurance, management, repairs, and utilities the owner covers. It is measured before the mortgage payment, before income taxes, and before large capital projects.

Net operating income
Gross potential rent − vacancy and credit loss = effective gross income
Effective gross income − operating expenses = NOI

Assume a 100-unit building at $2,150 per month: gross potential rent $2,580,000; less 5% vacancy leaves $2,451,000; less operating expenses of $600,000 leaves NOI of $1,851,000.

NOI is measured before financing on purpose. Two buyers can finance the same building very differently, but the building itself produces the same income either way. Separating the property's performance from the owner's loan lets everyone compare buildings on equal terms.

Nearly every other figure in this glossary is built on NOI. Dividing it by a cap rate gives value. Dividing it by debt service gives the coverage ratio lenders require. Dividing it by total cost gives yield on cost. When we say a regulation or a cost increase requires higher rent, what we mean is that the building needs more NOI to pay for it, and rent is where NOI comes from.

Where this comes up

Analysis that uses net operating income in the arithmetic.

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