What net operating income (NOI) is in real estate, the formula with an example, what counts as revenue and expenses, and how NOI sets value and loans.
Net operating income (NOI) is all of a property’s revenue minus all of its operating expenses. It is measured before depreciation and loan interest.
NOI equals revenue minus operating expenses. It is the number that cap rates, loans and investor payouts are built on, which is how NOI sets Colorado cap rates.
NOI describes the building, not the owner. Two buyers with different loans and tax situations should arrive at the same NOI for the same property. That is why buyers, sellers, appraisers and lenders all start their analysis with it.
How to Calculate Net Operating Income
To calculate net operating income, add up all the property’s revenue, then subtract its operating expenses.
NOI = Total revenue – Operating expenses
As an illustration, take a building with $250,000 of rent and $10,000 of other income, for $260,000 of revenue. With $90,000 of operating expenses, its NOI is $170,000. In real estate, property taxes count as an operating expense.
The full NOI calculation, step by step
Analysts usually build NOI in four steps, so that lost rent and extra income are both visible.
- Gross potential income. Start with the rent the property would collect if every space were leased at market rent, with no losses.
- Vacancy and credit loss. Subtract an allowance for empty space and for rent that tenants owe but do not pay.
- Other income. Add parking, signage, late fees, storage, laundry or expense reimbursements from tenants. The result is effective gross income (EGI).
- Operating expenses. Subtract the recurring costs of running the property. What is left is NOI.
In short: NOI = Effective gross income – Operating expenses.
Worked example: a five-suite building in Grand Junction
The figures below are an illustration, not a real listing. The same building appears in our guides to the rent roll behind the income line and the coverage lenders require. It also anchors our projecting NOI in a pro forma example.
The building has 10,000 square feet in five 2,000-square-foot suites. Tenants are on gross leases, so the owner pays the operating costs. One suite is vacant.
| Line | Annual amount | How it is set |
|---|---|---|
| Gross potential rent | $196,000 | Four leased suites plus the vacant suite at a $20 per square foot market rent |
| Other income | $4,000 | Signage and late fees |
| Potential gross income | $200,000 | Rent plus other income |
| Less vacancy and credit loss (8%) | -$16,000 | Allowance for empty space and unpaid rent |
| Effective gross income | $184,000 | |
| Property tax | -$22,000 | Assessor value x assessment rate x mill levy |
| Insurance | -$9,000 | |
| Common-area utilities | -$8,000 | |
| Repairs and maintenance | -$10,000 | |
| Snow removal | -$3,000 | |
| Property management (5% of EGI) | -$9,200 | |
| Replacement reserve | -$2,800 | Some analysts carry this below NOI |
| Total operating expenses | -$64,000 | |
| Net operating income | $120,000 | EGI minus operating expenses |
Operating expenses here are about 35% of effective gross income. That share is the expense ratio, and comparing it with similar buildings shows whether costs look normal.
What Counts as Revenue and Operating Expenses?
Revenue is everything the property earns, and operating expenses are the costs of running it.
Revenue examples: rent, laundry income, pet rent.
Operating expense examples: maintenance, insurance, property management, legal fees, utilities, property taxes.
Depreciation, loan interest and income taxes are left out of NOI.
The table below sorts the common line items. It follows the standard definition: NOI comes after operating expenses but before debt service, capital expenditures and income taxes.
| Item | In NOI? | Why |
|---|---|---|
| Base rent | Yes | Core revenue |
| Expense reimbursements and CAM charges | Yes | Revenue that offsets owner costs |
| Parking, signage, storage, late fees | Yes | Other income |
| Property taxes and insurance | Yes | Recurring costs of ownership |
| Repairs, maintenance, snow removal | Yes | Recurring operating costs |
| Management fees and payroll | Yes | Recurring operating costs |
| Mortgage principal and interest | No | Financing, not operations |
| Depreciation and amortization | No | Non-cash accounting entries |
| Income taxes | No | Depend on the owner, not the building |
| Capital expenditures, such as a new roof | No | Large, one-time investments |
| Lawsuit settlements, insurance proceeds | No | One-time or non-operating items |
Reserves and capital items: check the convention
Sources differ on whether a replacement reserve belongs above or below NOI. Some valuation guides treat estimated maintenance and capital spending as part of operating cost, while others keep all capital items out.
Neither approach is wrong, but mixing them is. When you compare two buildings, or compare a seller’s NOI with a lender’s, confirm both use the same treatment.
Property taxes in a Colorado NOI
Property tax is usually the largest fixed cost in a Colorado NOI, so it pays to understand how it is set.
- The formula. Tax equals the assessor’s actual value, times the assessment rate, times the local mill levy.
- The 2026 assessment rate. Most commercial buildings are assessed at 25% of actual value in 2026, down from 27% in 2025. Vacant land, industrial and commercial personal property are at 26%.
- Payment in arrears. Colorado counties collect tax one year behind, so 2026 taxes are paid in 2027. Owners pay in full by April 30, or in halves due February 28 and June 15.
- Reappraisal. Colorado reappraises all real property in every odd-numbered year. Values are based on the market as of June 30 of the prior year, and assessors consider income and expenses for commercial property.
Because of the arrears and the two-year cycle, last year’s tax bill can understate next year’s. A buyer should estimate the tax line from the current assessment and the next reappraisal, not only from the seller’s history.
NOI vs Net Income and Cash Flow
NOI is measured before financing and taxes, while net income and cash flow come after them.
Cap rates use NOI, not net income. Pre-tax cash flow is NOI minus debt service, the loan payments.
| Measure | Starts from | Subtracts | Who it describes |
|---|---|---|---|
| Net operating income | Effective gross income | Operating expenses | The property |
| Before-tax cash flow | NOI | Debt service and capital spending | The owner’s cash, before tax |
| Net income | Revenue | Operating costs, interest, depreciation, taxes | The owner’s books |
In the Grand Junction illustration, NOI is $120,000. With $95,760 of annual loan payments, before-tax cash flow is $24,240. Net income would be lower again once depreciation and taxes are booked.
How NOI Is Used
NOI is used to value a property, size its loan and pay its investors.
- Value: divide NOI by the cap rate.
- Loans: lenders compare NOI with the loan payment, using the debt service coverage ratio, and typically need 1.1 to 1.4 times coverage.
- Distributions: NOI is the basis for investor payouts and for cash-on-cash return.
NOI and value in Colorado towns
Value = NOI / Cap rate. At a 7% cap rate, each $1 of NOI is worth about $14.29 of value. Cutting $5,000 of yearly cost therefore adds roughly $71,400 of value at that rate.
Cap rates vary widely across Colorado’s mountain and Western Slope markets. The table applies RMCRE’s own market update figures to the same $120,000 NOI.
| Market (RMCRE report period) | Reported cap rate | Value of $120,000 NOI |
|---|---|---|
| Aspen (2026 year to date, June) | 4.5% – 6.0% | $2,000,000 – $2,666,667 |
| Steamboat Springs (Q1 2026) | 5.5% – 6.0% | $2,000,000 – $2,181,818 |
| Durango, established properties (2026 outlook) | 5% – 7% | $1,714,286 – $2,400,000 |
| Chaffee County (April 2026 year to date) | 6.5% | $1,846,154 |
| Mesa County / Grand Junction (June 30, 2026 year to date) | 7.0% | $1,714,286 |
| Montrose (Q2 2026) | 8% | $1,500,000 |
The same income is worth far more in a resort town with low cap rates. In Mesa County’s mid-2026 market update, the cap rate moved from 7.75% to 7.0% year over year. For full valuation methods, see valuing commercial property in Colorado.
NOI and loan size
Lenders size a commercial loan from NOI, not from the purchase price alone. A lender requiring 1.25 times coverage lets the loan payment reach only NOI divided by 1.25. For the $120,000 illustration, that is $96,000 a year of debt service.
How to Increase NOI
You increase NOI by raising income or cutting operating costs.
In Durango, better operations on older buildings can lift NOI by 15% to 25%. Reconciling CAM charges each year recovers costs that owners often lose quietly. Vacancy is the largest single cost in a commercial building, so leasing matters most. See what a property manager does to protect NOI.
Common levers, in rough order of impact:
- Lease the vacant space. In the illustration, leasing the empty suite at $20 per square foot adds up to $40,000 of rent.
- Bring below-market rents up at renewal. A suite at $18 against a $20 market loses $4,000 a year.
- Add scheduled rent increases to new leases so income keeps pace with costs.
- Recover costs that leases allow the owner to pass through, and reconcile them every year.
- Rebid service contracts for snow removal, landscaping, janitorial and insurance.
- Protest the assessment in a reappraisal year when the assessor’s value is above market.
- Reduce utility use in common areas with lighting and controls.
Cutting maintenance to inflate NOI usually backfires. Buyers and lenders look for deferred maintenance, and the repair bill comes back as a price cut.
Trailing, In-Place and Pro Forma NOI
The same building can show three different NOI figures, and a listing does not always say which one it uses.
| Version | What it measures | Best use |
|---|---|---|
| Trailing 12-month (T-12) NOI | Income and expenses actually collected and paid over the past year | Checking real performance |
| In-place NOI | Current leases on the rent roll, annualized, less current expenses | Pricing what a buyer gets on day one |
| Pro forma NOI | Projected income after planned leasing or rent increases | Testing upside and planning |
In the illustration, the vacant suite matters. With 20% of the space empty and no allowance for credit loss, in-place NOI is about $97,200. The stabilized figure of $120,000 assumes the suite leases. At a 7% cap rate, that gap is worth roughly $326,000 of price.
Common NOI Mistakes
- Using pro forma NOI as if it were actual. Ask for the T-12 and the rent roll, and compare them.
- Leaving out vacancy and credit loss. Even full buildings turn over, and lenders apply an allowance.
- Leaving out management. A self-managing seller may show no fee, but a buyer or lender will add one.
- Using last year’s property tax. Colorado’s arrears system and odd-year reappraisal can change the bill.
- Counting one-time income, such as a lease termination fee or an insurance payout, as recurring.
- Deducting loan payments or depreciation. Both belong below NOI.
- Mixing reserve conventions when comparing buildings or cap rates.
Frequently Asked Questions
Does NOI include mortgage payments?
No. NOI is calculated before debt service, so mortgage principal and interest are not deducted. That keeps NOI the same no matter how the property is financed. Cash flow is NOI minus the loan payments.
Does NOI include property taxes?
Yes. Property taxes are a recurring operating expense, so they are deducted before NOI. Income taxes on the owner’s profit are not deducted.
Is NOI the same as cash flow?
No. NOI comes before loan payments and capital spending, while cash flow comes after them. A property can show a healthy NOI and still produce little cash if its loan payments are high.
Is a higher NOI always better?
A higher NOI is better only when it is real and repeatable. An NOI raised by skipped maintenance, one-time income or rents that tenants cannot sustain will not hold up in due diligence. Look at the trend over several years, not one year.
How does vacancy affect NOI?
Vacancy cuts income while most expenses stay the same, so NOI falls faster than occupancy. In the illustration, going from 92% to 80% effective occupancy drops NOI from $120,000 to about $97,200.
What is a good NOI?
There is no single good NOI, because it depends on the building’s size and price. Investors judge NOI through ratios instead: the cap rate against price, the expense ratio against similar buildings, and coverage against the loan payment.
NOI Analysis for Colorado Properties
RMCRE members analyze a property’s financials from local data for purchases, sales and refinancing. For a review of your own numbers, see RMCRE valuation and consulting.
Rocky Mountain Commercial Real Estate has connected partner brokers across Colorado mountain towns since 2010. We can compare your NOI and expense ratio with recent deals in the Grand Junction commercial market and other towns we cover.
