Property Valuation & InvestmentAbbreviation: NOI

Net Operating Income (NOI)

The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.

Abbreviation: NOI·Pronounced: “N-O-I”

Full Definition

Net Operating Income (NOI) is the annual income generated by an income-producing property after deducting operating expenses from gross income, but before subtracting mortgage payments (debt service). NOI = Potential Gross Income − Vacancy & Credit Losses − Operating Expenses. Operating expenses include property taxes, insurance, maintenance, property management fees, and utilities — but NOT mortgage principal and interest, depreciation, or income taxes. NOI is used in the income approach to appraisal (Value = NOI ÷ Cap Rate) and is a fundamental metric for evaluating investment property performance independent of financing.

Real-World Example

An apartment building has potential gross income of $120,000/year. After 5% vacancy ($6,000) and $54,000 in operating expenses, NOI = $120,000 − $6,000 − $54,000 = $60,000.

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How Net Operating Income (NOI) Appears on the Real Estate Exam

Common question types, tested concepts, and what to watch out for

NOI does NOT include mortgage payments. This is the most commonly tested NOI concept. Operating expenses include taxes, insurance, maintenance, management — not debt service or depreciation.

A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.

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Gross Rent Multiplier (GRM)(GRM)

A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.

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Appraisal

A professional estimate of a property's market value prepared by a licensed or certified appraiser.

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Depreciation

A reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.

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