The number every other number is built on

Why NOI is the number underneath every other number

Net operating income is what a property earns from operating — before any loan, before capital projects, before taxes on the owner. Every headline metric inherits it: the cap rate is NOI over price, DSCR is NOI over debt service, and an income-approach appraisal is NOI capitalized at a market rate. That last one is why small errors here are expensive: at a 6.5% cap, a single dollar of overstated annual expenses is about fifteen dollars of understated value, and a $3,000 expense nobody itemized moves an appraisal by roughly $46,000. Getting NOI right, line by line, is the cheapest due diligence in real estate.

How it is built

Start with gross scheduled rent — every unit at its lease rent, vacant ones at market. Take out vacancy and credit loss, then add the income that is not rent: laundry, parking, fees. That sum is effective gross income. Subtract the operating expenses — property taxes, insurance, management, routine repairs, owner-paid utilities, and the miscellany of running a building — and what remains is NOI. Vacancy applies to the rent line only: other income is earned or it is not, but it is not vacant. This page keeps that arithmetic visible and live, so you can watch what a point of vacancy or a revised tax bill does to the bottom line as you type it.

What stays out — and what people wrongly leave out

Out, always: mortgage payments (financing describes the buyer, not the building), capital expenditures (a roof is an investment in the asset, not a cost of operating it), depreciation (an accounting entry, not cash), and income taxes. Wrongly left out, constantly: management, by self-managing owners — the work still costs what a manager would charge, and an underwriter prices it at 8–10% of collected rent regardless; a vacancy allowance, on the argument that "it's always full"; and the boring lines, pest control and snow and accounting, which individually round to nothing and together are real money. On commercial property with NNN leases, expenses the tenants reimburse net out — the NOI question becomes what leaks past the reimbursements.

Reading the expense ratio

The operating expense ratio — expenses over effective gross income — is the sanity check on your own inputs. Stabilized multifamily typically runs 35–50%; single-family rentals often less because the tenant carries utilities; older buildings, and any building where the owner pays heat, run higher. A ratio in the low twenties usually means missing lines, not a miracle property; one above sixty says the expenses include something that is not operating — a renovation, a mortgage — or the building has a problem worth understanding before anything is signed. Either way, the ratio failing the smell test is the cue to re-read the lines above.

One property's NOI is an afternoon's work; a portfolio's is a discipline. The free Schedule of Real Estate Owned generator carries these same figures — income, expenses, cash flow — across every property you own, in the layout lenders ask for.