NOI (Net Operating Income)
A property's total income minus operating expenses, before debt service and capital expenditures.
Definition
Net Operating Income (NOI) is the annual income generated by a property after deducting all operating expenses but before accounting for debt payments, capital expenditures, depreciation, and income taxes. It's the most important metric for valuing commercial real estate and is used to calculate cap rates and debt service coverage ratios. For small bay properties, NOI is calculated by taking gross rental income, adding other income (late fees, parking, etc.), and subtracting operating expenses like property taxes, insurance, management fees, repairs, and utilities.
Formula
NOI = Gross Income - Operating ExpensesExample
A 20-unit small bay property collects $300,000 in annual rent with $75,000 in operating expenses. NOI = $300,000 - $75,000 = $225,000