Question 1

What is Net Operating Income (NOI)?

Accepted Answer

NOI is the total income a property generates minus all operating expenses, before debt service and income taxes. It is the single most important metric in commercial real estate underwriting. NOI = Effective Gross Income - Operating Expenses. It does NOT include mortgage payments, depreciation, or capital expenditures.

Question 2

What expenses are included in NOI?

Accepted Answer

Operating expenses included in NOI: property taxes, insurance, property management fees, maintenance and repairs, utilities (if owner-paid), landscaping, pest control, and administrative costs. NOT included: mortgage payments (debt service), capital expenditures, depreciation, income taxes, and leasing commissions.

Question 3

How do I increase my property's NOI?

Accepted Answer

Two ways: increase income or reduce expenses. Income strategies: raise rents to market, reduce vacancy, add ancillary income (parking, laundry, storage, pet fees). Expense strategies: contest property tax assessments, shop insurance, implement energy efficiency, optimize management fees. Even small NOI improvements can significantly increase property value.

Question 4

What is a good expense ratio for commercial property?

Accepted Answer

Expense ratios vary by property type. Multifamily: 35-50%, NNN Retail: 5-15% (tenants pay most expenses), Office: 40-55%, Industrial: 20-35%. A lower expense ratio means more of gross income flows to NOI. If your ratio is significantly above these ranges, there may be opportunity to optimize operations.

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