Net operating income (NOI) measures the income produced by real estate after property-level operating expenses but before financing costs, depreciation, capital expenditures, and typically corporate overhead.
A simplified formula is:
NOI = Property revenue - Property operating expenses
Property revenue can include rent and property-level ancillary income. Operating expenses can include real-estate taxes, insurance, utilities, repairs, maintenance, and property management costs.
What NOI excludes
NOI is designed to isolate property operations. It generally excludes:
- interest expense and debt service;
- depreciation and amortization;
- capital expenditures;
- income taxes at the corporate level; and
- general corporate overhead that is not allocated to the property.
That makes NOI different from Operating Margin, EBITDA, Funds From Operations, and GAAP net income.
Example
A property generates $12 million of annual rental and ancillary revenue and has:
- $1.8 million of property taxes;
- $800,000 of insurance;
- $1.1 million of repairs and maintenance;
- $700,000 of utilities and property management costs.
Property operating expenses total $4.4 million.
NOI = $12.0m - $4.4m = $7.6m
If the property also has $3 million of interest expense and $2 million of depreciation, those amounts do not reduce NOI under the standard property-level concept.
NOI margin
A related measure is:
NOI margin = NOI ÷ Property revenue
A rising NOI margin can indicate better rent growth, expense control, or operating leverage at the property level. It can also reflect portfolio mix changes, acquisitions, dispositions, or classification differences.
Why REIT investors care
NOI connects property operations to valuation. It is an input into Capitalization Rate analysis and is often used to track portfolio performance before financing decisions.
For growth analysis, investors often prefer Same-Store NOI, which holds the comparison portfolio more constant by excluding many acquisitions and dispositions.
Comparability caveat
NOI is widely used but not a GAAP line item with one universal presentation. REITs can differ in which property expenses they include, how they handle management fees, and whether figures are presented on a cash or GAAP basis.
Always use the issuer's reconciliation and definition before comparing NOI margins or growth rates across companies.
Sources
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Put property-level operating performance in broader company context before drawing a valuation conclusion.
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