Net Operating Income (NOI) is the actual or expected net income after operating expenses are deducted from effective gross income. A property's NOI is derived from its operating statement. When calculating NOI, mortgage and depreciation expenses are not included in operating expenses. NOI can be calculated before or after deducting replacements reserves, however, most lenders will include replacement reserves as part of their operating expense calculation.
To calculate your net operating income, see our Multifamily NOI Calculator.
NOI is important because it conveys a property's net income after operating expenses. It is the primary metric of a property's profitability with respect to income from operations. In the income approach to real estate valuation, the NOI and a CAP rate are used to calculate a property's market value. NOI is also used to calculate the debt service coverage ratio (DSCR) that lenders use to determine loan rates, loan terms and maximum loan amounts.
The formula for net operating income (NOI) is:
Effective Gross Income (EGI) is the total rental and other income minus vacancy and collections losses.
Operating Expenses is the total of recurring expenses and replacement reserves but does not include mortgage or depreciation expense.
Multifamily NOI is calculated from the information on its operating statement, which represents the various income and expenses related to a property over a specific time period. For multifamily properties, income is primarily rental income, but can also include recurring items like; laundry, parking, storage and RUBS. Effective gross income is the total of these recurring income items minus collections losses and vacancy. Operating expenses includes items like management fees, utilities, insurance, repairs & maintenance, real estate taxes, landscaping, janitorial, trash removal, advertising, supplies, pest control, security and miscellaneous expenses. Mortgage payments and depreciation are excluded from operating expenses. Operating expenses can be calculated with or without replacements reserves, however, most lenders will include replacement reserves as part of their operating expense calculation. Categories of income and expenses can vary by property.
To ensure an accurate NOI, multifamily investors should avoid some common operating statement errors. The 3 most common errors are:
Input property financial information for the last 12 month period: