A commercial property is a business
The most important idea in commercial real estate: a property is not just a building, it is a business that produces income. The building's "product" is space. Its "customers" are tenants who pay rent. Its income is the rent. Its expenses are things like property taxes, insurance, maintenance, and management. The money left over after paying expenses is the profit the property makes — and that profit is what pays the loan.
Building NOI step by step
Start with Gross Potential Rent (GPR) — the total rent the property would collect if every unit were leased at full market rent with zero vacancy. Subtract vacancy and credit loss (space that's empty, or rent billed but never collected) to get to a realistic income figure. Add any other income (parking, laundry, storage, fees) to get Effective Gross Income (EGI). Finally, subtract operating expenses (taxes, insurance, utilities, repairs, management, reserves) to arrive at NOI.
Net Operating Income
NOI = EGI − Operating Expenses = (GPR − Vacancy/Credit Loss + Other Income) − Operating Expenses
- GPR
- — Gross Potential Rent — full market rent at 100% occupancy
- Vacancy/Credit Loss
- — Rent lost to empty units or uncollected rent
- Other Income
- — Parking, laundry, storage, fees, etc.
- EGI
- — Effective Gross Income — realistic collected income
- Operating Expenses
- — Taxes, insurance, utilities, repairs, management, reserves
Worked example: A building collects $500,000 in rent and has $200,000 in operating expenses. NOI = $500,000 − $200,000 = $300,000.
NOI never includes debt service
A common beginner mistake is subtracting the loan payment from NOI. Don't — NOI measures the property's own performance, before financing. Loan payments are compared against NOI (see DSCR), not subtracted from it.
Try it: build NOI from the ground up
Adjust gross rent, vacancy, other income, and operating expenses — watch NOI update instantly.
NOI Builder
Walk from Gross Potential Rent to Net Operating Income and watch every step update live.
EGI
$980,000
Expense Ratio
42.9%
OpEx ÷ EGI
NOI Margin
57.1%
NOI ÷ EGI
Net Operating Income
$560,000
Module Check
A building collects $500,000 in rent and has $200,000 in operating expenses. What is its NOI?