Net Operating Income (NOI) Explained: How to Evaluate Twin Cities Multifamily Properties

When evaluating a duplex, fourplex, or apartment building in the Twin Cities, one of the most important numbers to understand is Net Operating Income (NOI).

Whether you’re purchasing your first rental property or have owned apartment buildings for decades, NOI plays a central role in determining a property’s financial performance and market value.

But what exactly is NOI? How is it calculated? And why does it matter so much when buying or selling investment property?

Let’s walk through the fundamentals using practical examples.

1. What Is Net Operating Income (NOI)?

Net Operating Income represents the income a property generates after deducting its normal operating expenses, but before mortgage payments, income taxes, depreciation, and capital expenditures.

The basic formula is:

NOI = Effective Gross Income − Operating Expenses

Effective gross income includes rental income and other property-related income after accounting for vacancy and collection losses.

Operating expenses generally include the ongoing costs necessary to maintain and operate the property.

NOI helps investors evaluate a property’s operating performance independently of how the property is financed.

That’s particularly important because two investors purchasing the same property may have very different mortgage payments.

2. Example: Calculating NOI on a Twin Cities Fourplex

Consider a hypothetical fourplex with four apartments renting for $1,500 per month.

Annual rental income:

4 units × $1,500 × 12 months = $72,000

Now let’s estimate the property’s operating expenses.

Income and expense category	Annual amount
Gross scheduled rental income	$72,000
Vacancy and collection allowance (5%)	−$3,600
Effective gross income	$68,400
Property taxes	$9,000
Property insurance	$3,500
Repairs and maintenance	$4,000
Owner-paid utilities	$3,000
Property management	$4,000
Other operating expenses	$1,500
Total operating expenses	$25,000
Net Operating Income	$43,400

In this example, the fourplex generates $43,400 in annual NOI.

This figure is useful when estimating the property’s value, comparing investment opportunities, and evaluating its ability to support mortgage debt.

The figures are hypothetical, not estimates of typical current Twin Cities expenses.

3. Which Expenses Should Be Included in NOI?

A proper NOI calculation should reflect the ordinary costs of operating the property.

Common operating expenses include:

Property taxes: Real estate taxes paid to the applicable county or municipality.

Insurance: Property and liability insurance premiums.

Repairs and maintenance: Recurring expenses such as plumbing repairs, appliance servicing, minor electrical work, and general upkeep.

Utilities: Water, sewer, natural gas, electricity, and trash collection when paid by the property owner.

Property management: Fees paid to a management company or a reasonable management allowance when evaluating an owner-managed building.

Landscaping and snow removal: Particularly relevant for Minnesota rental properties.

Administrative expenses: Accounting, bookkeeping, licensing, and other recurring property-related costs.

Not every property has the same expense structure.

For example, a duplex where tenants pay their own utilities may have significantly different operating expenses than an older apartment building where the owner pays for heat and water.

This is why accurate financial records are essential when evaluating investment property.

4. What Expenses Are NOT Included in NOI?

One of the most common mistakes investors make is subtracting mortgage payments when calculating NOI.

Mortgage principal and interest are not operating expenses for NOI purposes.

Other items generally excluded from NOI include:

• * Mortgage principal payments
• * Mortgage interest payments
• * Income taxes
• * Depreciation and amortization
• * Major capital improvements, such as replacing an entire roof

Why exclude mortgage payments?

Because NOI measures the property’s operating performance, not the financial circumstances of a particular buyer.

One investor might purchase with 25% down, while another uses 40% down.

The property’s NOI remains the same under either financing arrangement, assuming the underlying operations are unchanged.

Important distinction: Although major capital expenditures are generally excluded from NOI, investors should still budget for them when evaluating the property’s true economic performance.

A property with a strong NOI can still require substantial cash for an aging roof, boiler replacement, or major renovation.

5. NOI vs. Cash Flow: What’s the Difference?

NOI and cash flow are related, but they are not interchangeable.

NOI measures income after operating expenses but before financing costs.

Cash flow measures the money remaining after additional cash obligations, including debt service.

Let’s return to our hypothetical fourplex.

Annual NOI: $43,400

Suppose the property’s annual mortgage principal and interest payments total $32,000.

The calculation would be:

$43,400 − $32,000 = $11,400

That leaves $11,400 in annual cash flow before income taxes, capital expenditures, and other cash requirements not already included.

If the investor also sets aside $4,000 annually for future capital improvements, the remaining cash after that reserve would be approximately $7,400.

That distinction matters.

A property can show an attractive NOI while producing relatively little cash flow because of high borrowing costs.

Investors should examine both figures before making a purchase.

6. How NOI Affects Property Value

NOI is especially important when evaluating apartment buildings because buyers frequently use capitalization rates to estimate value.

The basic relationship is:

Property Value = NOI ÷ Cap Rate

Suppose a small apartment building generates $60,000 in annual NOI.

At a hypothetical 6% capitalization rate:

$60,000 ÷ 0.06 = $1,000,000

If the property’s NOI increases to $66,000 and the appropriate cap rate remains 6%:

$66,000 ÷ 0.06 = $1,100,000

That’s a $100,000 increase in indicated value from a $6,000 increase in annual NOI.

However, this is a mathematical illustration, not a guarantee that a particular improvement will increase the selling price by that amount.

Actual market value also depends on comparable sales, property condition, financing availability, buyer expectations, and prevailing capitalization rates.

For more information, see our articles on cap rates and small apartment building valuation.

7. Actual NOI vs. Pro Forma NOI

When reviewing investment-property listings, buyers may encounter two different income figures.

Actual NOI is based on the property’s existing or historical financial performance, subject to appropriate verification and normalization.

Pro forma NOI is based on projected income and expenses under certain assumptions.

For example, a seller might advertise an apartment building with:

• Actual annual NOI: $55,000
• Projected annual NOI after rent increases: $70,000

That $15,000 difference could have a major effect on the property’s estimated value.

But buyers should ask important questions.

Are the projected rents supported by comparable properties? Will existing leases permit the increases? Will renovations be required? What will tenant turnover cost? Are the projected operating expenses realistic?

A prudent investor should distinguish between income the property currently produces and income it might produce in the future.

Potential income growth can be valuable, but it should not be treated as guaranteed.

8. Why Accurate Expense Records Matter When Selling

For owners considering selling a duplex, fourplex, or apartment building, maintaining accurate financial records can make a significant difference.

Buyers and lenders often request documents such as:

• * Current rent rolls
• * Existing lease information
• * Historical income and expense statements
• * Property tax records
• * Insurance costs
• * Utility expenses
• * Maintenance and repair history
• * Information about major improvements

Incomplete records can create uncertainty.

And uncertainty often causes buyers to make more conservative assumptions about operating expenses and property value.

For example, if an owner cannot document utility expenses, a buyer may estimate them using comparable properties or other available information.

Similarly, a building with unusually low reported maintenance expenses may prompt questions about deferred maintenance.

Well-organized financial records can help buyers evaluate the property more confidently.

9. How to Improve NOI Before Selling an Investment Property

Property owners sometimes have opportunities to improve NOI before putting their buildings on the market.

Possible strategies include:

Reviewing rents: Determine whether existing rents are reasonably aligned with comparable properties, taking lease terms and applicable regulations into account.

Reducing unnecessary expenses: Review insurance, utilities, maintenance contracts, and other recurring costs without sacrificing property condition.

Improving occupancy: Address avoidable vacancy and turnover problems.

Reviewing utility arrangements: Where legally and practically appropriate, consider whether certain expenses can be allocated differently.

Addressing recurring maintenance problems: Repairs that eliminate ongoing costs may improve both NOI and marketability.

However, not every improvement makes financial sense.

An owner should consider the cost of the improvement, the time required, and whether a prospective buyer is likely to recognize the resulting financial benefit.

The objective is not simply to produce the highest possible NOI on paper.

It’s to demonstrate sustainable operating performance that a buyer can reasonably expect to continue.

10. Using NOI to Make Better Investment Decisions

NOI is one of the most useful financial measurements in investment real estate.

It helps buyers compare properties, evaluate potential values, and understand the income available to support financing.

It also helps sellers understand how their rental income and operating expenses influence what buyers may be willing to pay.

But NOI should never be evaluated in isolation.

Investors should also consider:

• * Cash-on-cash returns
• * Mortgage financing and debt-service coverage
• * Property condition
• * Future capital expenditures
• * Rental market conditions
• * Tenant stability
• * Location and neighborhood trends
• * Long-term investment goals

A property with strong NOI may still be a poor investment if the purchase price is too high or major expenses are approaching.

Conversely, a property with modest current NOI may offer opportunities for improvement if the purchase price and underlying fundamentals are favorable.

The key is understanding the complete financial picture.

Buying or Selling a Twin Cities Multifamily Property?

Whether you own a duplex, fourplex, or a larger apartment building, understanding your property’s net operating income is an important step toward determining its investment value.

At Inside Track Realty, LLC, we help Twin Cities buyers and sellers evaluate investment properties using rental income, operating expenses, comparable sales, property condition, and current market conditions.

Our real estate experience dates back to 1993, with a focus on investment properties since 2003.

Considering selling your rental property—or simply wondering what it may be worth?

Visit our Investment Property Valuation page:

Investment Property Valuation

Or call 612-270-4141 to discuss your property and investment goals.

Disclaimer: All financial examples are hypothetical and provided for educational purposes. Actual operating expenses, income, property values, and investment returns vary by property and market conditions.