How to Calculate NOI in Real Estate

Market Context

What NOI Is

Net operating income equals gross income minus operating expenses, before debt service (mortgage payments). NOI measures the income a property generates from operations alone — independent of how it is financed. Two identical properties with different financing structures have the same NOI but different cash flows after debt service. NOI is the property's operating performance; cash flow is the investor's return after financing.

What Goes Into Operating Expenses

• Property taxes
• Insurance (landlord policy)
• Property management fees (if applicable)
• Repairs and maintenance
• Utilities paid by landlord (water, trash, common area electric)
• CapEx reserves (major system replacements — roof, HVAC, etc.)
• Vacancy allowance (lost rent from vacant periods)

Note: mortgage principal and interest are NOT operating expenses — they are debt service, which is subtracted after NOI to get cash flow.

How NOI Drives Valuation

Commercial properties are valued using the cap rate formula: Value equals NOI divided by cap rate. If a property generates $60,000 NOI annually and the market cap rate is 6%, the property is worth $1,000,000. This means increasing NOI — through rent increases, expense reduction, or adding income streams — directly increases property value. Every $1,000 of added annual NOI at a 6% cap rate adds $16,667 of property value.

Dan White is a licensed Virginia real estate agent at Pearson Smith Realty and founder of FreeDealCalc.com. He has been investing in Northern Virginia real estate for 20+ years.