Net Operating Income — NOI — is the single most important number in real estate valuation. Every cap rate calculation, every broker opinion of value, and every lender underwrite starts here. If you own an apartment building in Los Angeles, understanding NOI is not optional.

What Is Net Operating Income (NOI)?

NOI is the income a property produces after operating expenses, but before debt service and income taxes. The formula:

NOI = Gross Rental Income − Vacancy Loss − Operating Expenses

How to Calculate NOI: Step by Step

Step 1. Start with gross potential rent — total rent if every unit were occupied at current rents.

Step 2. Subtract vacancy and credit loss — typically 3–7% in LA, though RSO buildings with long-term tenants often run 2–3%.

Step 3. Add other income: laundry, parking, storage, pet fees.

Step 4. Subtract operating expenses: property management (5–8%), property taxes, insurance, maintenance, owner-paid utilities, landscaping, accounting.

The result is your NOI.

What NOI Does Not Include

NOI deliberately excludes several items:

• Mortgage payments (debt service). NOI is a property-level metric, not an owner-level metric. Two owners with the same property but different financing have the same NOI.
• Depreciation. NOI does not include depreciation. Depreciation is a non-cash accounting expense for tax purposes. Since NOI measures a property's cash-generating ability, depreciation is excluded.
• Capital expenditures (CapEx). Roof replacements, HVAC systems, major plumbing — these are capital improvements, not operating expenses. They are excluded from NOI but must be accounted for separately in your cash flow analysis.
• Income taxes. NOI is a pre-tax figure.

NOI Example: 8-Unit Koreatown Building

Gross potential rent: $12,000/month × 12 = $144,000
Vacancy (3%): −$4,320
Effective gross income: $139,680
Property management (6%): −$8,381
Property taxes: −$18,000
Insurance: −$8,500
Maintenance and repairs: −$7,200
Other expenses: −$3,600
NOI: $93,999

At a 5.5% cap rate, this NOI supports a value of approximately $1,709,000.

How Lenders Use NOI

Lenders calculate Debt Service Coverage Ratio (DSCR): annual NOI ÷ annual debt service. Most lenders require a minimum DSCR of 1.20–1.25, meaning the property generates at least 20–25% more income than the debt costs.

Frequently Asked Questions About NOI

Does net operating income include depreciation?

No. Net operating income does not include depreciation. Depreciation is a non-cash accounting expense used for tax purposes. NOI measures the actual cash income produced by a property, so depreciation — which is not a cash outflow — is excluded. If you are modeling after-tax cash flow, depreciation matters. But it is not part of the NOI calculation.

Does NOI include mortgage payments?

No. NOI is calculated before debt service. Mortgage principal and interest payments are subtracted after NOI to arrive at pre-tax cash flow. This is intentional — NOI measures the property's performance independent of how it is financed.

What is the difference between NOI and cash flow?

NOI is income before debt service and taxes. Cash flow is what remains after you subtract mortgage payments from NOI. A property with strong NOI can still have negative cash flow if it is heavily leveraged.

Is property management included in NOI?

Yes. Property management fees are an operating expense and are subtracted when calculating NOI — even if you self-manage. Professional underwriters always include a management expense to produce a consistent, market-comparable number.

Does NOI include property taxes?

Yes. Property taxes are an operating expense and are included in the NOI calculation. They are subtracted from effective gross income along with insurance, maintenance, management, and other recurring operating costs.

How do I use NOI to value my LA apartment building?

Divide your NOI by the market cap rate for your submarket. Example: $90,000 NOI ÷ 5.5% cap rate = $1,636,000 value. Cap rates in LA vary from approximately 4.5% in Koreatown and the Eastside to 6.5% in South LA and Inglewood. Kingside Investment Group provides free NOI-based valuations for LA apartment owners. Call (213) 797-7181.

Kingside Investment Group provides free broker opinions of value for LA apartment buildings, built from actual NOI analysis — not automated estimates. Call (213) 797-7181 or email Andres.Diaz@kw.com.