NOI — net operating income — is the building’s income after operating expenses but before the mortgage. It’s the single number a commercial lender leans on hardest, because it decides both how much the building can borrow and what it’s worth. Get NOI right and the rest of the multifamily loan falls into place.
The net operating income formula
NOI is simple to state: gross income minus operating expenses. The nuance is in what counts on each side.
Gross income starts with the rent roll — all the rent the units bring in — plus other income the property earns (laundry, parking, storage, pet fees). Lenders then subtract a vacancy allowance, because no building stays 100% occupied all year.
Operating expenses are the costs of running the building: property taxes, insurance, property management, repairs and maintenance, utilities the owner pays, trash, landscaping, and reserves for replacements. What’s left is NOI.
What does NOT come out
This is where people trip up. Two big costs are deliberately excluded from NOI:
- The mortgage payment (debt service). NOI is measured before the loan, precisely so the lender can compare income to the payment. If the payment were already subtracted, the DSCR math wouldn’t work.
- Capital expenditures and income taxes. Big one-time improvements (a new roof) and your personal income taxes aren’t operating expenses, so they sit outside net operating income.
Keeping these out is what makes net operating income a clean, comparable measure of what the building itself produces. The IRS treats capital expenditures differently from operating expenses.
Why NOI decides the loan
NOI drives the two numbers that size a commercial multifamily loan:
- DSCR. The lender divides NOI by the annual mortgage payment. If NOI comfortably covers the payment (commonly 1.20–1.25x or better), the income side of the loan is there.
- Value. Commercial appraisers often value apartment buildings by dividing NOI by a market cap rate. Higher NOI means a higher appraised value — which raises how much the loan-to-value will support.
So NOI works both levers at once: it proves the building can carry the debt, and it lifts the value the loan is measured against. That’s why a lender scrutinizes it line by line.
Why your numbers and the lender’s may differ
Sellers love to present a rosy NOI — understated expenses, best-case rents, no vacancy. Lenders re-underwrite it with market assumptions: a realistic vacancy factor, management even if you self-manage, and true expense figures. The NOI that matters is the lender’s version, not the marketing flyer’s. Knowing that up front keeps you from overpaying on an inflated number.
A typical deal
A scenario I see often: an investor under contract on a 10-unit, handed a rent roll showing strong NOI. We rebuild it with a real vacancy allowance and market expenses, land on a slightly lower but defensible NOI, and size the loan off that. The deal still works — and it closes without a nasty surprise at the appraisal, because the number was honest from day one.
Ready to run your building’s numbers?
The fastest way to know what a building can borrow is to underwrite its NOI properly. Tell us about your deal and we’ll work it with you — in English or Spanish.
By Andres Jara — Alpha Equity Lending (NMLS #1855083). 20+ years in real estate finance, an MS in Finance, and an active South Florida investor and landlord.
