What is NOI and Why Does It Matter in Multifamily Investing?

By Mark Kenney | Think Multifamily

Let’s be real — the phrase “Net Operating Income” doesn’t exactly scream excitement.

But if you want to win in multifamily real estate, NOI is the number you need to know.

Because in this game? NOI is everything.

What is NOI?

NOI stands for Net Operating Income. It’s the money a multifamily property makes after you subtract operating expenses, but before you subtract loan payments or taxes.

Simple Formula:

NOI = Income – Operating Expenses

• Income = All the money coming in (rents, fees, laundry, parking, etc.)

• Operating Expenses = Costs to run the property (maintenance, payroll, insurance, property management, marketing, etc.)

⚠️ Note: NOI does not include your mortgage payment. That’s a financing decision — not an operational one.

❓ Wait… What’s Not Included in NOI?

This is where new investors get tripped up. NOI is not the same as profit or cash flow.

Here’s what doesn’t get counted in NOI:

❌ Mortgage payments (principal & interest)
❌ Capital expenditures (roof replacements, HVAC units, etc.)
❌ Depreciation
❌ Taxes

These affect cash flow and tax strategy, but not NOI.

Why Does NOI Matter So Much?

Because in multifamily, your property’s value is based on NOI — not comps.

Hold onto that thought.

This isn’t like single-family homes where “comps” (comparable sales) determine the price.

In commercial real estate — and yes, multifamily properties with 5+ units are considered commercial — value is driven by:

👉 How much money the property makes (NOI)
👉 The cap rate for the submarket

Quick Refresher: What’s a Cap Rate?

Cap rate (short for Capitalization Rate) is the return an investor expects to earn in that market.

• Low cap rate (4-5%) = Expensive market (e.g., Dallas, Miami)

• High cap rate (6-8%) = Riskier market (e.g., rural secondary cities)

You don’t control the cap rate. But you do control NOI. That’s your power play.

The Income Formula that Builds Real Wealth

Here’s how it works:

Value = NOI ÷ Cap Rate

Let’s say, for example:

• Your property produces $500,000 in NOI

• Market cap rate = 5%

$500,000 ÷ 0.05 = $10,000,000 in value

Now let’s say you increase NOI by just $50,000...

$550,000 ÷ 0.05 = $11,000,000

You just created $1 million in new equity — without buying another property.

Single Family vs. Multifamily: What's the Difference?

With multifamily, you’re not at the mercy of Zillow comps. You can force appreciation by boosting income or reducing expenses.

How Can You Improve NOI?

Good question.

Smart operators don’t just raise rents — they run the property like a business.

Here’s how to do it:

🔼 Add Income:

• Charge for parking, garages, pet rent, valet trash

• Offer premium units with upgrades

• Bill back utilities (RUBS)

🔽 Reduce Expenses:

• Renegotiate contracts (landscaping, trash, pest control)

• Implement energy efficiencies (LEDs, low-flow plumbing)

• Lower turnover with better retention and renewals

Even small tweaks can drive big returns.

Your NOI is the Key to:

→ Getting a loan or refinance
→ Selling at top dollar
→ Growing equity faster
→ Attracting serious investors

Because if you understand and control NOI, you’re not just a landlord — you’re a wealth builder.

🤔 FAQs About NOI

❓ Is NOI the same as cash flow?

Nope. Cash flow = NOI minus debt service, capex, and other financial items.

❓ How does NOI affect refinancing?

Lenders use your NOI to calculate Debt Service Coverage Ratio (DSCR). Higher NOI = better terms, more leverage.

❓ What’s a good NOI margin?

Depends on the asset class, but 50–65% operating expense ratios are typical for stabilized properties.

❓ Can NOI be manipulated?

Yes — sometimes aggressively. That’s why buyers and LPs need to dig into actuals vs. pro formas.

Final Thought

If you’re investing in multifamily — either as an LP or GP — you need to understand NOI.

You don’t have to be an accountant. But you do need to know:

→ NOI drives the value of your deal
→ You have some control over it
→ Every dollar added or saved = real wealth created

👉 Ready to use NOI to drive real wealth in your next deal?

Click here for more information & to Apply for Coaching — and get expert guidance that cuts through the fluff.

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