Real Estate MetricsNOI
Net operating income (NOI) is a property’s rental income minus operating costs, before financing. Funds from operations (FFO) adds depreciation back to a REIT’s net income and removes gains on property sales; adjusted FFO (AFFO) also deducts recurring capital spending. The debt service coverage ratio (DSCR) is NOI divided by loan payments.
Property investors and lenders use their own set of numbers because standard earnings understate the cash a building throws off. The core ones are net operating income, funds from operations, adjusted funds from operations and the debt service coverage ratio. Accounting and reporting rules differ by country, so check local definitions.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- Property valuation metrics, REIT metrics, Commercial real estate ratios
- Updated
The four key metrics
Net operating income (NOI) is a property's yearly gross income minus its operating costs.1
The debt-service coverage ratio (DSCR) divides cash flow or NOI by the loan payments due.1
FFO adds back property depreciation and strips out gains or losses from selling property.2 AFFO goes further by deducting recurring capital spending, but it has no standard definition.
How to analyse a property or REIT
Find NOI
Take annual gross income less operating expenses.1
Check debt coverage
Divide cash flow or NOI by the debt service.1
Stress interest-only loans
Lenders test the property as though the loan were amortizing.1
Use FFO for REITs
Add back depreciation, because accounting depreciation on buildings doesn't reflect their real value.3
Confirm the definition
Use the industry-standard FFO definition, which US regulators recognise.4
Adjust to AFFO
Deduct recurring capital spending, reading each company's own AFFO definition.
Worked examples
Example 1 — NOI
NOI $500,000A hypothetical building earns $800,000 in rent with $300,000 of operating expenses.
| Gross income | $800,000 |
| Operating expenses | −$300,000 |
| NOI | $500,000 |
NOI is annual gross income less operating expenses.1
Example 2 — DSCR
CoveredThe same building has hypothetical annual loan payments of $400,000.
| NOI | $500,000 |
| Debt service | $400,000 |
| DSCR | 1.25× |
DSCR is NOI divided by the debt service, so income covers payments 1.25 times.1
Example 3 — FFO
FFO $70mA hypothetical REIT reports net income of $50m, real estate depreciation of $30m and a $10m property sale gain.
| Net income | $50m |
| + Depreciation | $30m |
| − Sale gain | −$10m |
| FFO | $70m |
FFO adds back property depreciation and removes the one-off gain from the sale.2
FFO vs net income
| Aspect | FFO | Net income |
|---|---|---|
| Real estate depreciation | Added back | Deducted |
| Property sale gains | Excluded | Included |
| Standard | Industry (Nareit), non-GAAP | Accounting standards |
| Best for | REIT operating performance | General companies |
Where these metrics are used
Valuing REITs
Price ÷ FFO replaces the Price-to-Earnings Ratio.
Lending decisions
DSCR shows how safely Leverage is covered.
Dividend safety
Compare AFFO with the Dividend to judge the Payout Ratio.
Rate sensitivity
Watch DSCR as the Interest Rate on debt resets.
Advantages and disadvantages
Advantages
- Reflect cash generation better than net income.
- FFO is widely standardised by Nareit.
- DSCR shows debt risk directly.
- Allow comparison across property owners.
Disadvantages
- AFFO has no standard definition.
- FFO ignores maintenance capital spending.
- Non-GAAP figures can be presented selectively.
- Reporting rules differ by country.
Going deeper
Read as far as you need. Each level builds on the one before it.
NOI first
Beginner
NOI is annual gross income less operating expenses — the property's income before financing and taxes.1
Why FFO exists
Intermediate
FFO was designed because standard accounting depreciates buildings on a fixed schedule that often has little to do with their real value.3 Buildings often hold value even as accounts depreciate them.
Lender stress tests
Advanced
Even an interest-only loan should be judged as if it were being repaid, so the property must still cover full debt service.1 Outside the US, non-GAAP rules and REIT-style reporting differ by country, so definitions must be checked.
Common mistakes
Valuing REITs on EPS
Depreciation distorts earnings.
Comparing AFFO across firms
Each company defines it differently.
Ignoring capex
FFO overstates spendable cash.
Testing DSCR on interest-only payments
Use amortizing payments.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- NOI is gross income minus operating expenses.
- DSCR is NOI divided by debt service.
- FFO adds back real estate depreciation.
- AFFO deducts recurring capex but is not standardised.
- Reporting rules differ by country.
Frequently asked questions
Is FFO the same as cash flow?
What DSCR do lenders want?
Are these metrics used outside the US?
Further learning
- Mortgage- and Asset-Backed Securities
Property-backed debt.
- Leverage
How debt affects property returns.
- Payout Ratio
Dividend coverage from AFFO.
- Default Risk
What a weak DSCR signals.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Office of the Comptroller of the Currency (OCC). Comptroller's Handbook: Commercial Real Estate Lending (opens in a new tab) Checked .
- Nareit. Funds From Operation (FFO) (opens in a new tab) Checked .
- Nareit. Nareit Funds From Operations White Paper (2018 restatement) (opens in a new tab) Checked .
- U.S. SEC (Division of Corporation Finance). Non-GAAP Financial Measures (interpretations) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.