NOI (Net Operating Income)
The annual income generated by an investment property after deducting all operating expenses, but before mortgage payments and income taxes.
Net Operating Income (NOI) is the cornerstone metric for evaluating commercial real estate investments. It represents the property's true income-generating capacity, stripped of financing and tax considerations that vary by investor. **The NOI Formula:** NOI = Gross Rental Income − Operating Expenses **What's Included in Operating Expenses:** - Property taxes - Property insurance - Property management fees - Utilities (if landlord-paid) - Maintenance and repairs - Common area maintenance (CAM) - Marketing and leasing costs **What's NOT Included:** - Mortgage payments (principal and interest) - Income taxes - Depreciation - Capital expenditures - Tenant improvement allowances **Why NOI Matters for NNN Investors:** In triple net leases, most operating expenses are passed through to tenants, making NOI calculations simpler. For Absolute NNN properties: NOI ≈ Base Rent (since tenant pays all expenses) **NOI in Property Valuation:** NOI is the numerator in cap rate calculations: Property Value = NOI ÷ Cap Rate A property with $120,000 NOI at a 6% cap = $2,000,000 value **NOI Growth and Value Creation:** Properties with built-in rent increases (typically 1-2% annually) see NOI growth that compounds value: - Year 1: $100,000 NOI at 6% cap = $1,666,667 - Year 10: $121,899 NOI at 6% cap = $2,031,650 (22% appreciation from rent growth alone) **Red Flags in NOI Analysis:** - Pro forma vs. actual NOI discrepancies - One-time income items inflating NOI - Below-market expenses that will normalize - Deferred maintenance reducing near-term NOI
Frequently asked questions
How do you calculate NOI for NNN properties?
For true NNN properties where tenants pay all operating expenses, NOI is essentially equal to the base rent. For modified NNN or gross leases, subtract landlord-paid operating expenses (taxes, insurance, maintenance) from gross rent to calculate NOI.
What is a good NOI for investment property?
There's no universal 'good' NOI—it depends on purchase price. What matters is the relationship between NOI and price (cap rate). A property with $100,000 NOI is excellent at $1,400,000 (7.14% cap) but expensive at $2,500,000 (4% cap).
Does NOI include mortgage payments?
No. NOI is calculated before debt service (mortgage payments). This allows investors to compare properties regardless of financing structure. Cash flow after debt service is called 'Cash-on-Cash Return' or 'Pre-Tax Cash Flow.'
Related: cap-rate, absolute-nnn-lease, triple-net-lease, cash-on-cash-return