NOI Explained

Net Operating Income (NOI) is the single most important number in commercial real estate financing. It tells lenders whether your property generates enough cash to cover debt payments, fund reserves, and still turn a profit. Whether you’re refinancing an office building, a retail center, or a multifamily complex, every underwriter will ask: “What’s the NOI?” Understanding how NOI works — and how to improve it — can mean the difference between approval and rejection.

This guide breaks down NOI in plain English: what it is, how to calculate it, what lenders expect to see, and how to optimize your property’s NOI before you apply for commercial mortgage refinancing.

NOI Explained – The Plain-English Definition

Net Operating Income (NOI) is the cash a property generates after paying all operating expenses, but before paying debt service (mortgage payments), taxes, or capital expenditures.

Think of it this way:

• Gross Revenue: All the money coming in (rent, parking fees, laundry income)
• Operating Expenses: All the costs to keep the property running (insurance, maintenance, property management, utilities)
• NOI = Gross Revenue – Operating Expenses

Example: A $1M multifamily property collects $120,000/year in rent. Operating expenses (insurance, repairs, management, utilities) total $45,000/year. The NOI is $120,000 – $45,000 = $75,000.

That $75,000 is what’s available to cover the mortgage, build reserves, and provide investor return. Lenders use NOI to determine how much debt the property can support.

How to Calculate NOI

The formula is straightforward:

NOI = Effective Gross Income – Operating Expenses

Where:

• Effective Gross Income (EGI) = Gross Potential Rent – Vacancy Loss + Other Income
• Operating Expenses = Insurance + Maintenance + Management + Utilities + Property Taxes + Marketing + Repairs (but not mortgage payments or capital improvements)

Worked Example

Let’s walk through a 20-unit apartment building:

Revenue Side:

• Gross Potential Rent: $240,000/year (20 units × $1,000/month × 12 months)
• Vacancy Loss: -$12,000 (5% vacancy rate)
• Other Income: +$6,000 (laundry, parking, pet fees)
• Effective Gross Income (EGI) = $234,000

Expense Side:

• Property Insurance: $8,000
• Maintenance & Repairs: $18,000
• Property Management (8% of EGI): $18,720
• Utilities (common areas): $7,200
• Property Taxes: $24,000
• Marketing & Leasing: $3,000
• Total Operating Expenses = $78,920

NOI = $234,000 – $78,920 = $155,080

That $155,080 is the property’s annual net operating income. Use our commercial mortgage calculator to see how much debt this NOI can support at different interest rates and loan terms.

What Lenders Want to See

Commercial mortgage underwriters use NOI to calculate the Debt Service Coverage Ratio (DSCR) — the ratio of NOI to annual debt service. Most lenders require a DSCR of at least 1.25× (meaning NOI must be 25% higher than the annual mortgage payment).

Example: If your property’s NOI is $155,080, and your proposed mortgage payment is $120,000/year, your DSCR is $155,080 ÷ $120,000 = 1.29× — just above the typical 1.25× threshold.

NOI Benchmarks by Property Type

Property Type	Typical Expense Ratio	Acceptable DSCR	What Lenders Look For
**Multifamily**	40-50% of EGI	1.25× – 1.35×	Stable occupancy, low turnover
**Office**	30-40% of EGI	1.30× – 1.40×	Long-term leases, creditworthy tenants
**Retail**	25-35% of EGI	1.35× – 1.50×	Anchor tenants, traffic counts
**Industrial**	20-30% of EGI	1.25× – 1.35×	Triple-net leases preferred

Lenders also scrutinize trailing 12-month NOI (actual historical performance) and stabilized NOI (projected performance assuming full occupancy and market rents). If your property is newly renovated or has deferred maintenance, the underwriter will adjust NOI downward to account for normalized expenses.

Use our DSCR calculator to model different NOI scenarios and see how they affect your loan amount.

Improving Your NOI Before Refinancing

Boosting NOI before you apply can unlock better loan terms, higher proceeds, or even turn a marginal deal into an approval. Here’s how:

1. Increase Revenue

• Raise rents to market: If your rents are below comparable properties, bring them up gradually (or at lease renewal).
• Reduce vacancy: Fill vacant units before applying. A 95% occupied building underwrites better than an 85% one, even if gross revenue is similar.
• Add ancillary income: Charge for parking, storage, pet rent, or laundry. Even $50/month per unit adds up.

2. Cut Operating Expenses (Without Cutting Quality)

• Shop insurance annually: Property insurance premiums vary widely. Get 3-4 quotes every year.
• Renegotiate service contracts: Landscaping, trash, pest control — all negotiable.
• Energy efficiency: LED lighting, programmable thermostats, and low-flow fixtures reduce utility costs.
• Self-manage (if feasible): Removing a 10% management fee increases NOI by 10% instantly. Only viable for hands-on owners with time.

3. Defer Non-Essential CapEx Until After Closing

• Operating expenses reduce NOI. Capital expenditures (roof replacement, HVAC, parking lot repaving) do not. If possible, delay major CapEx until after refinancing — or finance it separately.

4. Document Everything

• Lenders want trailing 12-month financials (profit & loss statements, rent rolls, expense receipts). Clean, organized books inspire confidence. If your property management software generates reports, use them. If not, hire a bookkeeper for a few hours.

A property with $10,000/year higher NOI can support roughly $100,000-$150,000 more debt (depending on rate and term). That’s the power of optimization.

NOI Calculator & Next Steps

While there’s no standalone NOI calculator on RefiLoop (NOI is a straightforward subtraction), you can use our suite of commercial real estate calculators to model how NOI drives loan sizing:

• DSCR Calculator: See how NOI and debt service interact
• Commercial Mortgage Calculator: Model payments at different loan amounts
• LTV Calculator: Understand how property value and NOI together determine loan proceeds

Once you’ve calculated your NOI and run the numbers, connect with RefiLoop’s network of 7,000+ commercial lenders. We’ll match your property to the lenders who specialize in your asset type, LTV, and DSCR profile — and get you multiple competing quotes.

Get Expert Advice →

FAQ: Net Operating Income Explained

What is a good NOI? There’s no universal “good” NOI — it depends on property value, debt load, and asset type. What matters is the DSCR (NOI ÷ annual debt service). Most lenders want 1.25× or higher. A $200,000 NOI is excellent for a $2M property with a $1M loan, but weak for a $5M property with a $3M loan.

Does NOI include mortgage payments? No. NOI is calculated before debt service. Mortgage principal and interest payments are deducted after NOI to determine cash flow to the owner.

Does NOI include property taxes? Yes — property taxes are an operating expense and are deducted when calculating NOI. (Some sources use “NOI before taxes” as a synonym for EBITDA, but in commercial real estate underwriting, NOI typically includes property taxes.)

How is NOI different from cash flow? NOI is the property’s operating profit before debt service. Cash flow is what’s left after paying the mortgage. If NOI is $100,000 and annual debt service is $80,000, cash flow is $20,000.

Can I use projected NOI for refinancing? Lenders prefer trailing 12-month actual NOI from your financials. If the property is stabilizing (recent renovations, lease-up in progress), they may consider a pro forma NOI with appropriate discounts for vacancy and credit loss. Be prepared to justify every assumption with comparable rents, signed leases, and market data.

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Last updated: July 2026. Rates and underwriting standards vary by lender, property type, and market conditions. This guide is for informational purposes only and does not constitute financial or legal advice.