Gross rents are collected, vacancy losses are subtracted, and operating expenses are paid. What remains is net operating income, or NOI. It measures the property’s profitability before debt service and income taxes.

NOI is the foundation for cap-rate valuations and many lending decisions. Expenses included are property taxes, insurance, maintenance, utilities (if paid by the owner), and management fees. Capital improvements and mortgage payments are excluded.

Accurate NOI requires honest accounting for vacancy and reserves. Inflated income or understated expenses produce misleadingly high NOI and can lead to overpayment. Investors and lenders scrutinize the components closely. Rising NOI over time is one of the clearest signs of a healthy investment property.

Everything downstream of valuation begins with a defensible net operating income.