Net Operating Income (NOI)
Net operating income is a property's effective gross income minus operating expenses, before debt service and income taxes — the income figure used to calculate cap rate.
What it means
NOI = Effective Gross Income − Operating Expenses. Effective gross income is gross potential rent minus vacancy plus other income (parking, laundry, reimbursements). Operating expenses include property taxes, insurance, utilities (owner-paid), repairs and maintenance, management fees, and reserves.
NOI excludes debt service, capital expenditures, depreciation, and income taxes. Two deals with identical NOI can produce wildly different cash-on-cash returns depending on financing.
When reviewing a seller's NOI, look for aggressive management-fee omissions, under-stated vacancy, missing reserves, and "below-the-line" capex disguised as operating expense.