How to Calculate NOI for Commercial Real Estate
Net Operating Income to Evaluate Commercial Properties
What Is NOI in Commercial Real Estate?
Net operating income (NOI) is the income a commercial property produces after subtracting ordinary operating expenses from its gross operating income. It is calculated before mortgage payments, income taxes, depreciation, and capital expenditures.
NOI formula: Gross operating income − operating expenses = net operating income.
Commercial real estate investors use NOI to compare properties, estimate value with a capitalization rate, and evaluate whether a building’s operations support its asking price.
To calculate NOI, all direct expenses involved in the day-to-day operations of the building are deducted from total rental income. These expenses include a variety of maintenance and repair expenses, plus utilities, supplies, security, management commissions and property taxes. These are the core operating expenses that show up on a standard income statement (also called “operating statement”) for a commercial property.
Mortgage payments of interest and principal are not considered operating expenses. In addition, certain large expenditures, such as leasing commissions and capital improvements, are also left out because they are not a normal part of everyday operations. Property management is an operating cost to evaluate even when the current owner self-manages. If a listing omits that cost, include a reasonable management allowance in your own analysis and document the assumption. Keep capital costs and reserves visible in a separate cash-flow analysis.
Experienced investors understand what might be missing from a statement of NOI in a property listing. They compensate for these expenditures by making their own projections of income and cash flow for any property they are interested in buying. It is essential for the beginner investor to learn how to create such projections before venturing into buying commercial real estate.
Trailing, projected and stabilized NOI
Review more than one period, but do not assume that a three- or five-year average is always the best measure. Older income may reflect expired leases, different occupancy or costs that no longer apply. A simple average can hide those changes.
- Trailing NOI: based on actual operations for a stated period, commonly the most recent 12 months.
- Projected NOI: based on expected income and expenses for a future period. Identify proposed rent changes, vacancies and expense assumptions.
- Stabilized NOI: based on supportable normal operations rather than temporary conditions. State the occupancy, rents and costs assumed.
Compare historical operating statements with the current rent roll, leases, collections, tax bills, insurance costs and repair history. Explain adjustments for unusual items rather than simply deleting unfavorable costs. Financial-document access, review periods and termination rights depend on the parties’ agreement and the transaction terms.
Worked NOI example
Assume a rental property has the following annual figures. These numbers are hypothetical and do not represent current Hagerstown rents or expenses.
| Item | Annual amount |
|---|---|
| Scheduled rental income | $120,000 |
| Less vacancy and collection loss | −$6,000 |
| Plus other property income | +$3,000 |
| Effective gross income | $117,000 |
| Less operating expenses, including management | −$37,000 |
| Net operating income | $80,000 |
If annual debt service is $30,000, the property still has $80,000 NOI. Pre-tax cash flow after debt service would be $50,000 before capital spending, reserve movements or other non-operating cash items. Debt service changes cash flow, not NOI.
NOI and the Cap Rate
To estimate a property’s value using a market capitalization rate, divide NOI by the cap rate: Property value = NOI ÷ capitalization rate expressed as a decimal. To calculate the cap rate from a known price, use Cap rate = NOI ÷ property value × 100 when expressed as a percentage. Because market cap rates vary by property type, condition, location, and market conditions, review recent comparable sales and local information with a knowledgeable commercial broker, appraiser, or lender.
As a hypothetical sensitivity example, $80,000 NOI divided by an assumed 8% cap rate gives $1,000,000. Dividing the same NOI by an assumed 7% gives approximately $1,142,857. These rates are illustrative, not a current local market range. Select a supported rate using relevant comparable sales and property-specific analysis. See our cap rate formula and ROI comparison.
Net operating income is also an important way of comparing properties to one another. It is interesting to compare two buildings in close proximity to each other and if you have access to NOI figures for both. You will soon see that many factors will affect bottom line figures, including expense-to-profit ratio, management style, and vacancy rates.
Because of such variability and uncertainty, using NOI by itself or even as your main measuring tool is not advisable. As any appraiser will tell you, square footage, age, condition and overall desirability of the building, and the economic climate of the city or neighborhood, are all relevant factors you must consider. It is best to use a combination of tools to figure out if a specific property is worth purchasing at a particular price.
Commercial real estate is a complex subject and you need a big-picture perspective to be a successful investor. But NOI still stands out as one of the most important tools for the simple reason that commercial buildings need to be profitable. While it is easy to speculate on a particular building’s profit potential, nothing beats seeing the actual proof of its current profitability under the current owner, even if you must adjust for variables. Using NOI is a good way to begin the process of evaluating a possible investment.
Continue your analysis with the commercial property valuation guide and the cash-on-cash return versus ROI comparison. For a property review, contact Roberto Gonzalez.
Underwriting reference: Fannie Mae Multifamily Guide: Income Analysis. Lender underwriting rules are product-specific. Explanation and examples updated October 30, 2026.