Net Operating Income (NOI)

Net operating income is a property's rental income after vacancy and operating expenses, before any mortgage payment, depreciation or income tax. It is the numerator of a commercial DSCR calculation and the figure appraisers capitalize to value income property.

Operating expenses include property taxes, insurance, management, maintenance, reserves, utilities the owner pays and association dues. They do not include principal, interest or capital improvements. On a $500,000 rental at $4,000 rent with 5% vacancy and typical expenses, NOI runs around $28,500 a year.

Commercial mortgage lenders divide NOI by annual debt service to get DSCR and typically require 1.20 to 1.25. Residential DSCR lenders skip NOI and divide gross rent by the full monthly payment instead, which produces a higher ratio for the same property. The Wikipedia article on net operating income redirects to earnings before interest and taxes, the corporate equivalent of the same idea.

Further reading: Net Operating Income (NOI) on Wikipedia.