At The Thomas Duke Company, we help our clients make strategic decisions that grow and
protect their commercial real estate portfolios. One of the most critical numbers any investor
should know is Net Operating Income, or “NOI.” It’s the gold standard for assessing the true
performance of an investment property. Whether you’re buying, selling, or holding,
understanding your property’s NOI can mean the difference between a profitable investment
and a costly misstep.
In this blog, we’ll explore what NOI is, why it matters, and how to avoid common mistakes in
calculating it. We’ll also walk through what’s included, what’s not, and how NOI impacts
everything from financing to future value.
NOI is the annual income a property generates from its operations, before deducting things like
mortgage payments, depreciation, or taxes. In other words, it tells you what the property earns
just from being a property.
It’s a straightforward metric that strips away the noise—like different financing structures or
owner-specific tax strategies—and allows for apples-to-apples comparison between properties.
Lenders use it. Appraisers use it. Investors swear by it. Because when it comes to
understanding a building’s performance, nothing paints a clearer picture than NOI.
The formula? It’s simple:
NOI = Total Rental Income + Other Income – Operating Expenses
For such an important metric, the key is in the details. Let’s break it down.
Rental Income should be based on what you’re actually collecting—not what you could be
collecting if the property were fully leased. That means you need to factor in vacancy and credit
loss to get to your effective rental income.
Other Income could include revenue from vending machines, laundry, parking, signage, or
storage. These may seem minor, but they add up and should be included in your total income.
On the flip side, Operating Expenses are the necessary costs to run and maintain the property.
That includes property taxes, insurance, utilities (if landlord-paid), repairs, maintenance,
property management fees, and sometimes reserves if required by a lender.
Here’s what’s not included in NOI:
These exclusions are intentional. NOI is meant to represent how the property performs
independent of ownership structure or financing.
So why does this one number carry so much weight? Because it affects almost everything:
Bottom line: if you own, operate, or plan to acquire commercial property, NOI isn’t just another
line on a spreadsheet. It’s the foundation of your investment’s performance story.
While the NOI formula is simple, it’s surprisingly easy to get wrong. Over the years, I’ve seen
clients—sometimes even experienced investors—make avoidable errors that skew their
property’s perceived value and performance. Here are the most common missteps:
Including Capital Improvements as Expenses
Big-ticket items like a new roof or HVAC system are capital expenditures. They improve the
value of the asset over time and should not be lumped into annual operating expenses. These
are depreciated over multiple years—not expensed all at once.
Counting Potential Rent Instead of Actual Rent
It’s tempting to base NOI on what a fully-leased property could earn. But that’s not the reality.
NOI should be grounded in the actual rental income being collected today, after factoring in
vacancies and bad debt.
Forgetting Owner-Paid Utilities and Maintenance
If you, as the landlord, pay utilities for common areas—or for tenants under full-service
leases—those costs must be included as operating expenses. Skipping them paints an inflated
picture of the property’s earnings.
Adding in Loan Payments or Depreciation
Remember, NOI is a financing-neutral number. Debt service and depreciation are important for
your overall cash flow and tax planning, but they do not belong in NOI. Including them
invalidates the metric’s usefulness for comparison or valuation.
This one trips up a lot of people, especially during a sale or refinancing.
Let’s say you recently spent $50,000 on a new parking lot. That’s a major upgrade, and it
benefits the property for years—not just this year. Because of that, it should not be treated as a
line item in your annual operating expenses.
Instead, those costs are capitalized and depreciated over time. Why does this matter? If you
incorrectly deduct the full $50,000 in one year, your NOI will appear artificially low. This can
affect your property’s valuation, hurt your ability to refinance, or even give buyers the upper
hand during negotiations.
When in doubt, ask yourself: Does this cost maintain the property’s current operations, or does it
improve or extend the property’s life? If it’s the latter, it’s a capital expense.
If you’re preparing to sell your property, NOI is the single most scrutinized figure in your financial
package. Serious buyers—and their lenders—will dissect every line of your income and
expenses. If they find inconsistencies or inflated figures, they’ll either reduce their offer or walk
away entirely.
On the flip side, a well-documented, accurate NOI builds trust and credibility. It shows you’ve
run your property with professionalism and transparency. That can go a long way in defending
your asking price and speeding up due diligence.
Here’s the hard truth: If a buyer discovers you’ve overstated your NOI—even
unintentionally—they’ll assume there are other issues lurking under the surface. Your
negotiation power evaporates quickly after that.
Understanding NOI isn’t just about knowing a formula—it’s about knowing how to apply it
correctly to real-world scenarios. At The Thomas Duke Company, we’ve helped clients across
Michigan and beyond evaluate, correct, and leverage their NOI to make more informed
decisions.
Whether you’re preparing to list a property, assessing a new acquisition, or simply reviewing
your portfolio’s performance, our team is here to help you get the numbers right. We’ve even
created a handy NOI Cheatsheet to guide you through the process. You can download it below.
And if you ever want to walk through your specific numbers or clarify what counts and what
doesn’t, I’m happy to jump on a call.
Jordan Schafer, Associate
📧 jschafer@thomasduke.com | 📞 (248) 479-0130
Make faster, smarter investment decisions. Our free NOI Cheatsheet shows you how to
calculate real returns—and avoid the costly mistakes we see too often.
