Net Operating Income (NOI): How It's Calculated
A clear net operating income calculation walkthrough — EGI minus operating expenses equals NOI, and exactly what NOI excludes (debt, capex, depreciation, tax).
By Michael Laudino, LFO Capital LLC · Published 2026-06-17
Net operating income (NOI) is effective gross income minus operating expenses: NOI = EGI − operating expenses. It measures a property's unlevered, recurring profitability before financing and capital costs.
NOI is the engine of commercial valuation. Divide it by a cap rate and you get value; multiply value swings by the cap rate and you understand why a small NOI change moves price so much. Because it is calculated before debt, NOI lets two buyers with different loans compare the same asset on equal footing.
What NOI includes is straightforward: all property-level operating revenue (rent plus other income, net of vacancy and credit loss) minus all recurring operating expenses — taxes, insurance, management, utilities, repairs and maintenance, and administrative costs. To see how the revenue side is built, walk through the pro forma guide.
What NOI excludes is where most mistakes happen. NOI does not include debt service (interest and principal), capital expenditures or replacement reserves, depreciation, or income tax. Each of those is either a financing decision, a capital-account item, or a tax artifact — none belongs in a measure meant to isolate operating performance. Folding any of them in either understates or overstates NOI and distorts every downstream metric.
Worked example — EGI to NOI
| Line | Amount |
|---|---|
| Effective gross income (EGI) | $1,116,000 |
| Less: operating expenses | −$502,200 |
| Net operating income (NOI) | $613,800 |
The math: NOI = EGI − operating expenses = $1,116,000 − $502,200 = $613,800. No debt service, no reserves, no depreciation, no tax — those all sit below this line.
The discipline: NOI is unlevered and pre-capital — keep debt, reserves, depreciation, and tax out of it or you'll misprice the deal.
Frequently asked questions
What is the formula for net operating income?
NOI = effective gross income − operating expenses. Effective gross income is gross potential rent minus vacancy plus other income; operating expenses are the recurring costs to run the property.
Does NOI include debt service?
No. NOI is a property-level, unlevered measure. Debt service is a financing cost that sits below the NOI line and varies by buyer, so it is excluded.
Are capital reserves part of NOI?
Conventionally, no — capital reserves and capital expenditures fall below NOI. This is why a pre-reserves NOI drives the headline valuation while post-reserves NOI reflects true cash flow.
Get the full underwriting, grade & PDF — free
Tell UpsideIQ your investment criteria once — every deal gets analyzed, graded, and flagged against YOUR targets, not a generic score.
← Part of the Underwriting Fundamentals hub
Related