What is NOI (Net Operating Income)?

Setup

A 24-unit multifamily property collects $432,000 in gross potential rent and $14,400 in other income (laundry, parking). Vacancy and credit loss run 6%. Operating expenses include $48,000 property tax, $14,200 insurance, $36,000 utilities, $28,800 repairs and maintenance, $19,440 management fee at 4.5% of effective gross income, and $7,200 in replacement reserves.

Interpretation

NOI of $266,840 is the cash flow figure that feeds DSCR, cap rate, and debt yield calculations. Note that NOI sits above debt service and capex by definition. Many lender NOI calculations exclude the replacement reserve line; the underwriter has to flag whether the bank's policy treats reserves as an operating expense or an addition below the NOI line.

Multifamily

NOI is built from rent roll and T-12 with vacancy, replacement reserves (typically $250-$350 per unit per year), and a market-conform management fee (usually 3% to 5% of effective gross income), even on owner-managed properties. Underwriters normalize T-12 expenses against trailing three years to flag deferred maintenance.

Office and retail

NOI must be reconciled with the rent roll for in-place vs scheduled rent, contractual escalations, percentage rent (retail), and tenant improvement and leasing commission reserves. Recoveries of operating expenses (CAM, taxes, insurance under triple-net leases) are netted against the gross expense line.

Industrial

Often the cleanest NOI calculation: triple-net leases with stable tenants, minimal management overhead, and modest reserves. Underwriters still normalize for any below-market in-place rent and stress test against a market re-leasing scenario at lease maturity.

Hospitality

Hotel NOI is calculated from departmental income and undistributed operating expenses per the Uniform System of Accounts for the Lodging Industry (USALI), with a separate FF&E reserve (typically 4% of revenue) treated as an operating expense. RevPAR and ADR drive the underwriting more than rent roll math.