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Net Operating Income (NOI) is the income a rental property generates after subtracting vacancy loss and operating expenses, but before mortgage payments, capital expenditures, or income tax — a core figure lenders use to assess a rental or investment property's cash flow.
NOI starts with effective gross income — potential rent plus other income, minus vacancy and credit loss — and then subtracts operating expenses such as property tax, insurance, utilities, maintenance, and management fees. It deliberately excludes the mortgage payment, depreciation, and capital expenditures, isolating how the property itself performs independent of how it's financed.
NOI is central to investment property and multi-unit financing: lenders divide it by the annual mortgage payment to calculate a debt-coverage ratio, a different test than the GDS/TDS ratios used for owner-occupied qualifying. Appraisers also use NOI to estimate value, typically by dividing it by a market capitalization rate, particularly on larger multi-unit and commercial properties.
Excludes the mortgage: NOI is calculated before debt service, so it isolates how the property itself performs, independent of financing.
Used for a debt-coverage test: many rental and multi-unit lenders divide NOI by the annual mortgage payment to calculate a debt-coverage ratio (DCR), a different test than the GDS/TDS ratios used for owner-occupied qualifying.
Feeds property valuation: appraisers and lenders often estimate a property's value by dividing NOI by a market capitalization rate, particularly for multi-unit and commercial buildings.
Distinct from rental offset: link rental offset — typical 1-4 unit residential qualifying usually applies a simpler rental-offset or add-back approach to a borrower's own ratios, while NOI-based underwriting is standard for larger income and multi-unit properties.
A 4-unit rental property generates the following figures for the year:
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
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