The direct answer
For NOI, include the recurring costs of operating the property on the chosen income basis. Keep financing, depreciation, investor income tax and acquisition capital separate. Explain the treatment of replacement reserves because valuation conventions can differ.
Create an expense inventory
Start with property taxes, insurance, ordinary maintenance, management and owner-paid utilities. Add other recurring obligations that apply to the property, such as an association charge or administrative cost. Tenant-paid items may sit outside the owner’s budget, but expense reimbursements can bring both revenue and cost into a commercial statement. The inventory should follow the lease and actual responsibility rather than a generic percentage of rent.
To apply the approach to an editable scenario, use the NOI Calculator. For the neighboring question, explore Rental Property Calculator.
Separate replacement from ongoing maintenance
A recurring allowance for small repairs is different from a major capital replacement. An analysis may include a replacement reserve, deduct capital spending separately or use another stated convention. The important point is transparency and consistency. Do not count a roof replacement in both annual maintenance and an overlapping capital line. If the cost has not been modeled, the NOI subtotal does not mean the building requires no future capital.
Check normalization and the evidence period
An unusually low expense year may reflect deferred work or owner self-management. Identify adjustments needed to make the scenario representative, and label them as assumptions. Tax reporting references are useful context but do not mean every tax deduction belongs in valuation NOI. Compare expense categories with the related income period, especially when a property is partially vacant or newly leased.
Worked example
For $47,500 effective income and $15,000 of recurring operating expenses, NOI is $32,500. If a $20,000 annual debt payment is incorrectly included in the expense total, the reported $12,500 would be after-debt cash flow, not the same NOI measure.
Common mistakes and limitations
A zero management fee because the owner performs the work may hide an economic operating requirement. Use the same owner-management convention when comparing properties.
NOI conventions vary in treatment of reserves and owner-specific expenses; debt service and depreciation must not be included as operating expenses.
Frequently asked questions
Is depreciation an NOI expense?
No. It is a noncash accounting or tax item outside this operating subtotal.
Must every NOI calculation include the same reserve?
Conventions can differ. State the reserve treatment and align it with the comparison income and valuation assumptions.
Sources and further reading
The article’s examples are illustrative arithmetic. The references below provide context for operating, valuation or transaction concepts; they do not endorse the assumptions or the calculator.
- IRS — Publication 527 (2025), Residential Rental PropertyRental income and expense concepts; operating/rental expense context.
- Office of the Comptroller of the Currency — Comptroller's Handbook — Commercial Real Estate LendingNOI, direct capitalization, cap-rate valuation and DCF concepts for commercial real estate.
- Appraisal Institute — Basic Formulas — Income CapitalizationIncome/cap-rate/value relationships, gross income multiplier and debt-coverage formula references.
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