How this number is made
Net operating income is the building’s income before debt. Vacancy and operating costs come out. The mortgage, income tax, and depreciation stay out.
- Gross rent is the rent roll at full occupancy.
- Operating costs include tax, insurance, repairs, and management. Not principal and interest.
Formula
NOI = gross rent × (1 − vacancy) − operating costs.
Worked example
With the figures already in the form, net operating income is $24,000.
Questions
Why leave the mortgage out?
So the building can be compared with a different loan, or with no loan. Debt service is the next step, on the coverage page.
Is depreciation an operating cost?
No. It is a tax concept, not cash leaving the property this year.