How NOI is used
- Real estate: NOI ÷ property value = capitalisation rate. Used by investors to compare yields across properties before financing.
- Operating businesses: NOI ÷ gross income = operating margin — the share of every revenue rupee left after running costs but before debt servicing and tax.
- Lender underwriting: Banks divide NOI by annual debt service to compute the Debt Service Coverage Ratio (DSCR); ≥ 1.25 is typical for commercial loans.
What's not in NOI
By design, NOI excludes anything that isn't a recurring operating cost: mortgage interest, principal repayments, depreciation, amortisation, owner-level income tax, capital expenditure (renovations), one-off legal fees. That keeps NOI comparable across owners and financing structures.
FAQ
Should I include vacancy and bad-debt allowance?
For real estate yes — the standard formula is "potential gross income − vacancy & credit loss = effective gross income; − operating expenses = NOI". You can model vacancy as a negative income line.
What's a good cap rate?
Depends on geography and asset class. Indian residential 2–4%; commercial 7–10%; US multi-family 5–7%; high-grade office in major metros 4–6%. Higher cap rate = higher yield but typically more risk.