NOI is the most widely used metric in commercial property. It is also useful for residential investors who want to understand how their properties perform as businesses rather than as tax shelters.
NOI starts with your Effective Gross Income and subtracts all your operating expenses: management, insurance, maintenance, letting fees, ground rent, service charges. Critically, NOI excludes mortgage payments, depreciation, and tax.
Why exclude mortgage payments? Because the building’s ability to generate income should be measured independently of how you finance it. A property that generates strong NOI is a good investment whether you use a 50% mortgage or pay cash. The mortgage is your decision. The building’s performance is what it is.
For a typical BTL in Portsmouth with rent of £12,000 a year, your costs might be: management £1,200, insurance £250, maintenance £1,200, letting fees £500, void allowance £1,000. Total expenses: £4,150. Your NOI is £7,850.
Lenders use NOI to calculate your Debt Service Coverage Ratio. Valuers use it to calculate capital values. Professional investors use it to compare different properties across different financing structures.
Start thinking in NOI terms. It separates the building’s performance from your personal financial decisions. That clarity is invaluable.
The formula
NOI = EGI - Operating Expenses
Why this matters
NOI is the language of professional property. It strips away financing and tells you how well the building performs as a business. Lenders and valuers will ask for this number.
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