CRE 101 · deweyluong.realtor

Net Operating Income (NOI) Explained: The One Number That Prices a Georgia Commercial Property

Almost every commercial price in Georgia is one number divided by a rate — and that number is NOI. On the made-up Gwinnett center on this page, $480,000 of potential rent becomes $460,000 of collected income and then $340,000 of net operating income after $120,000 of operating expenses. At a 6.25% cap rate that NOI prices the building at $5,440,000 — which means every $1 of NOI is worth $16 of price, and a seller who overstates NOI by $47,200 with two quiet assumptions is asking $755,200 for income that does not exist. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

The worked example uses made-up, rounded numbers to teach the mechanics. This page is general education, not financial or legal advice.

The income stack, line by line

• Gross potential rent (GPR): the rent if every square foot were leased at market rent and every tenant paid in full, all year. It is a ceiling, not an income figure — no property collects it.
• Less vacancy and credit loss: empty space plus rent that is billed but never collected. The vacancy rate lesson works this line in full; appraisers and lenders deduct a market vacancy even on a fully leased building.
• Plus other income: parking, signage, storage, percentage rent, late fees — real money, but only the documented, recurring kind counts. One-time receipts are not income.
• Effective gross income (EGI): what the property actually collects. The EGI lesson shows why the seller's pro forma version of this line is where overpricing starts.
• Less operating expenses: taxes, insurance, CAM, management, utilities, repairs — the cost of running the building for one year. The operating expenses lesson lists what belongs here and what sellers leave out.
• Net operating income (NOI): EGI minus operating expenses. NOI is the property's income before debt, before income tax, and before capital items — one clean year of what the building itself earns, whoever owns it and however it is financed.

What NOI is not

• NOI is not cash flow: the mortgage is not an operating expense. Debt service, replacement reserves and capital expenditures all sit below the NOI line. NOI minus those items is the cash flow an owner actually pockets — the cash-on-cash lesson starts there.
• NOI is not profit on a tax return: depreciation and interest change taxable income; they do not change NOI. Two owners with identical buildings report identical NOI and very different tax bills.
• NOI is not a promise: a pro forma NOI is a forecast. The trailing twelve months on the rent roll and T-12 are history. Price history; treat forecasts as a negotiation, not a fact.
• One year is a snapshot: NOI says nothing about which leases expire next year or what the roof costs in year three. The DCF lesson prices every year separately for exactly that reason.

Worked example. The numbers below are made up and rounded to teach the mechanics. This is not a real property.

• The property: a made-up Gwinnett retail center, 24,000 square feet at a market rent of $20.00 per square foot. Gross potential rent is 24,000 × $20.00 = $480,000.
• Vacancy and credit loss: vacancy at 5% of GPR = $24,000; credit loss at 1% = $4,800. Other income (parking and signage, documented) adds $8,800. Effective gross income is $480,000 − $24,000 − $4,800 + $8,800 = $460,000.
• Operating expenses: property taxes $46,000 + insurance $18,000 + CAM $30,000 + management at 4% of EGI $18,400 + repairs and miscellaneous $7,600 = $120,000 — an expense ratio of 26.1% of EGI.
• NOI: $460,000 − $120,000 = $340,000. The NOI margin is $340,000 ÷ $460,000 = 73.9 cents of every collected dollar surviving expenses.
• What NOI prices: at a 6.25% cap rate, value = $340,000 ÷ 0.0625 = $5,440,000. Because 1 ÷ 0.0625 = 16, every $1 of NOI carries $16 of price — and every $1 of NOI a buyer cannot verify should come off the price sixteen times over.
• Below the line: replacement reserves at $0.25/SF = $6,000 come after NOI, leaving $334,000. Against made-up annual debt service of $244,800, the DSCR is $340,000 ÷ $244,800 = 1.39x, and cash flow after debt service is $340,000 − $244,800 = $95,200 before reserves and capital items. Same building, three different numbers — NOI, cash flow after reserves, and cash flow after debt. Know which one a quoted figure is.

The seller's two quiet assumptions

• Zero vacancy: the pro forma collects all $480,000 plus other income for an EGI of $488,800 — $28,800 more than the building collects. No multi-tenant property runs at 0% vacancy across a hold; appraisers will not underwrite it and neither should a buyer.
• No management fee: the seller self-manages and expenses no management at all, showing operating expenses of $101,600 instead of $120,000. A buyer who hires management — or whose lender underwrites a market fee either way — pays that $18,400 every year. It belongs in NOI whether the current owner writes the check or not.
• The combined price of the two assumptions: seller NOI is $488,800 − $101,600 = $387,200 against the buyer's $340,000 — a gap of $47,200. At a 6.25% cap rate, $47,200 ÷ 0.0625 = $755,200 of asking price resting on income that does not exist. Neither assumption is a lie exactly; both are simply the seller's year presented as every year. Rebuilding NOI from the leases, the tax bill and the insurance invoice — not the brochure — is the buyer's whole job.
• The expense-ratio sanity check: operating expenses here are 26.1% of EGI. A Georgia retail pro forma showing expenses under roughly 15% of EGI is almost always missing taxes at the post-sale assessment, insurance at current premiums, management, or reserves — find which one before the price discussion, not after the appraisal.

Cho nhà đầu tư người Việt

NOI (net operating income — thu nhập vận hành ròng) là con số quyết định giá của gần như mọi bất động sản thương mại: giá trị = NOI ÷ cap rate. Cách tính: tổng tiền thuê tiềm năng, trừ hao hụt do trống và không thu được tiền thuê, cộng thu nhập khác, ra thu nhập gộp hiệu quả (EGI); EGI trừ chi phí vận hành (thuế, bảo hiểm, CAM, phí quản lý, sửa chữa) thì ra NOI. NOI chưa trừ tiền trả nợ ngân hàng, chưa trừ quỹ dự phòng thay thế và chi phí vốn — những khoản đó nằm dưới dòng NOI. Ví dụ trên trang này (số liệu giả định): trung tâm bán lẻ 24.000 SF ở Gwinnett, tiền thuê tiềm năng $480.000, trừ trống 5% ($24.000) và hao hụt 1% ($4.800), cộng thu nhập khác $8.800, EGI là $460.000; chi phí vận hành $120.000; NOI là $340.000. Ở cap rate 6,25%, giá trị = $340.000 ÷ 0,0625 = $5.440.000 — tức mỗi $1 NOI tương đương $16 giá. Người bán thường thổi phồng NOI bằng hai giả định lặng lẽ: trống 0% và không tính phí quản lý, đội NOI lên $387.200, tức đội giá thêm $755.200. Khi xem một thương vụ, hãy tự dựng lại NOI từ hợp đồng thuê, hóa đơn thuế và bảo hiểm thật — đừng dùng NOI trong tờ quảng cáo. Đây là thông tin giáo dục chung, không phải tư vấn tài chính hay pháp lý.

Frequently asked questions

What is net operating income (NOI) in commercial real estate?

NOI is effective gross income minus operating expenses: the income a property produces in one year before mortgage payments, income taxes, depreciation, replacement reserves and capital expenditures. In the worked example, $460,000 of effective gross income minus $120,000 of operating expenses gives NOI of $340,000.

How is NOI used to price a commercial property?

Value equals NOI divided by the capitalization rate. At a 6.25% cap rate, the worked example's $340,000 NOI prices the property at $5,440,000. Because each dollar of NOI is multiplied by 1 divided by the cap rate — $16 of price per $1 of NOI at 6.25% — small NOI errors become large price errors, which is why buyers rebuild NOI from source documents instead of accepting a pro forma.

What expenses are excluded from NOI?

Debt service, income taxes, depreciation, tenant improvement costs, leasing commissions, replacement reserves and capital expenditures are all excluded from NOI — they sit below the line. Operating expenses included in NOI are the recurring costs of running the property: taxes, insurance, CAM, management, utilities and ordinary repairs.

What is the difference between NOI and cash flow?

NOI is measured before the loan. Cash flow subtracts debt service (and, on a fully loaded basis, reserves and capital items) from NOI. In the worked example, NOI is $340,000, reserves of $6,000 sit below the line, and cash flow after $244,800 of annual debt service is $95,200 before reserves and capital items. A property can show strong NOI and thin cash flow if it is heavily financed.

NOI là gì, nhà đầu tư người Việt cần lưu ý gì?

NOI là thu nhập vận hành ròng: thu nhập gộp hiệu quả trừ chi phí vận hành, chưa trừ tiền trả nợ, thuế thu nhập và chi phí vốn. Giá trị bất động sản = NOI ÷ cap rate, nên mỗi $1 NOI bị thổi phồng sẽ đội giá lên nhiều lần — ví dụ trên trang này (số liệu giả định): NOI thật $340.000 ở cap rate 6,25% cho giá trị $5.440.000, nhưng người bán dùng giả định trống 0% và bỏ phí quản lý thì NOI thành $387.200, đội giá thêm $755.200. Hãy dựng lại NOI từ hợp đồng thuê, hóa đơn thuế và bảo hiểm thật thay vì tin NOI trong tờ quảng cáo. Đây là thông tin giáo dục chung, không phải tư vấn tài chính hay pháp lý.

This page is general education, not investment, legal, tax, lending or financial advice. Every figure in the worked example is made up and rounded to teach the mechanics. Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 678-707-2498 · dewey.luong@serhant.com