Net Operating Income

Net operating income, or NOI, is all the income a property produces in a year minus all the costs of operating it. Income means rent, plus parking, laundry, storage or any other fees the building collects. Operating costs mean property taxes, insurance, repairs, utilities the owner pays, property management and an allowance for vacancy. It leaves out three things on purpose: mortgage payments, income tax and large one-off capital works like a new roof. Those depend on who owns the building and how they financed it. NOI is meant to describe the building on its own. A rental collecting $60,000 a year with $22,000 of operating costs has an NOI of $38,000.

Income property is priced on its income. Divide NOI by the cap rate that similar properties trade at and you get the market value. $38,000 of NOI at a 6% cap rate implies a value of about $633,000. That relationship runs both ways, which is what makes NOI so important. Raise NOI by $3,000, by cutting an insurance premium or filling a vacant unit, and at the same cap rate the property is worth $50,000 more. A sponsor who talks about "forcing appreciation" is talking about raising NOI.

Fractional listings usually show the pieces rather than the total: monthly rent, occupancy, and a list of fees. Put them together. Annualise the rent, subtract a vacancy allowance if the listing assumes full occupancy, subtract the operating costs the sponsor names and you have the NOI the projections rest on. Then ask what is missing. Property taxes are often reassessed upward after a sale. Insurance has been rising fast in coastal and wildfire markets. A management fee below 8% of rent is unusual for single-family rentals. If any of these look light, the NOI is overstated, and so is everything downstream of it.