Calculate Net Operating Income by deducting operating expenses from gross rental income.
NOI = Gross Income - Vacancy Loss - Operating Expenses
Net operating income is the annual income a property generates after deducting all operating expenses but before debt service and income taxes. It is the single most important number in commercial real estate valuation because it directly drives property value through the cap rate formula.
For triple net lease properties, NOI calculation is simplified because the tenant pays most or all operating expenses. In an absolute NNN structure, NOI is essentially equal to the base rent. For standard NNN or double net leases, the landlord may retain some expenses like roof and structural maintenance, which reduce NOI.
NOI = Gross Rental Income - Vacancy Loss - Operating ExpensesOperating expenses include property taxes, insurance, maintenance, property management fees, utilities (if landlord-paid), and reserves for capital expenditures. In an NNN lease, the tenant covers taxes, insurance, and maintenance, so the landlord's operating expenses may be limited to asset management and reserves.
NOI is the numerator in the cap rate equation. A property's value is NOI divided by the market cap rate. If you can increase NOI by $10,000 on a property trading at a 6.0% cap rate, you add approximately $167,000 in property value. This is why rent escalators in NNN leases are so valuable. A 2% annual increase on $200,000 in rent adds $4,000 to NOI each year, compounding over a 15-year term.
NOI does not include mortgage payments, depreciation, or income taxes. These are financing and tax decisions that vary by investor. By excluding them, NOI provides a clean measure of the property's operating performance that allows fair comparisons between properties regardless of how they're financed. Use the DSCR calculator to layer in debt service after calculating NOI.
Start with total gross rental income, subtract vacancy loss (typically 3-7% for commercial), then subtract all operating expenses: property taxes, insurance, maintenance, management fees, and reserves. The result is your net operating income.
No. NOI is calculated before debt service, depreciation, and income taxes. It measures the property's operating performance independent of financing. To assess your return after mortgage payments, use the cash-on-cash return or DSCR calculation.
NNN properties have the highest NOI margins in commercial real estate because tenants pay operating expenses. An absolute NNN lease can have an effective NOI margin above 95% of gross rent. Multi-tenant properties with landlord-paid expenses typically run 55-70% NOI margins.
NOI is income after operating expenses but before financing. Cash flow (also called pre-tax cash flow) is NOI minus debt service. A property with $180,000 NOI and $120,000 annual mortgage payments produces $60,000 in cash flow.