Encyclopedia
Net operating income (NOI)
A property's income minus operating expenses, before debt payments and income tax.
For example: A buyer recalculates NOI with a realistic vacancy allowance. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say you own a mixed-use building and your statement shows a healthy profit. When we lay it out the way a buyer will, we pull the mortgage payments and a one-time roof repair out of the expenses, add a vacancy allowance, and arrive at a figure a buyer’s lender will accept.
What I’d tell a friend
Build your net operating income the way a buyer will, from actual rents and actual costs. If your number and theirs match, the price conversation gets much easier.
Why it matters to you
Most income property is priced off it, so every dollar of NOI moves the value. If the seller's figure leaves out real costs or counts one-time income, you'll pay for income that isn't there.
How to use it in your deal
Buyers should rebuild NOI from leases and actual statements, not a broker's summary. Check vacancy, management fees, reserves and expenses the seller handles personally. Adjust for leases ending soon and below-market rents. Sellers should show actual NOI clearly with supporting documents. Lenders size loans on their own version of NOI.
Owners can raise NOI by recovering more costs under leases, cutting waste and leasing vacant space. Tenants rarely think about NOI, but a landlord's push to lift it shows up in renewal rents and tighter recovery clauses, so read those carefully. A good habit for everyone: put actual NOI for the last three years side by side and ask why it moved. Ask for the trailing twelve months, not just a pro forma, and compare the two.
Mistakes I see
Including debt payments as expenses. Using a pro forma NOI as if it were actual. Ignoring vacancy and management. Counting one-time income.
In BC and Vancouver
No statute defines NOI; it's an industry measure. Property tax data comes from BC Assessment and municipal notices.
Official sources: BC Assessment appeal guide · Canada Mortgage and Housing Corporation
How to build it
Start with the rent you could collect if fully leased, plus other income such as parking. Subtract a sensible allowance for vacancy and bad debt. Then subtract the normal costs of running the building: taxes, insurance, repairs, utilities and management.
Leave out loan payments, depreciation and big one-time capital projects. Those matter to you, but they sit below this line, and mixing them in makes your building hard to compare with others.
Questions to ask before you sign
- Is this actual or pro forma?
- What expenses are included?
- What vacancy is assumed?
- Which leases end soon?
- How does my lender calculate it?
Keep reading
Related terms: capitalisation rate (cap rate), Debt service coverage ratio (DSCR), Stabilized NOI
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.