What is the relationship between NOI and Debt Service?

Net Operating Income (NOI) represents the revenue generated from a property after deducting all operating expenses excluding debt service and taxes. Debt Service, on the other hand, refers to the funds required to cover the repayment of principal and interest on a loan.

The correct answer emphasizes that NOI must be sufficient to cover Debt Service. This is crucial for property owners and investors, as it indicates that the income generated by the property is sufficient to meet financial obligations. If the NOI is greater than or equal to the Debt Service, it suggests that the property is financially viable and can support its own costs, including loan payments.

A scenario where NOI exceeds Debt Service is optimal, as it creates positive cash flow, which is essential for the sustainability of property management and investment. Conversely, if NOI is less than Debt Service, it can indicate a potential risk of negative cash flow, potentially leading to financial difficulties. Therefore, ensuring that NOI is adequate to cover Debt Service is a fundamental aspect of real estate financial management.