How to Calculate Net Operating Income (NOI)
NOI is a rental's income after operating expenses but before financing. This guide itemizes every line that belongs in it — and the ones that don't — with a full worked example.
Net operating income is the number almost every other rental metric is built on. Cap rate divides by it. Appraisers capitalize it into a value. Lenders size loans against it. Get NOI right and the rest of your analysis stands on solid ground; get it wrong and everything downstream inherits the error.
NOI is deliberately simple in concept: the income a property produces after the costs of operating it, but before financing and before taxes.
The formula
NOI = Effective gross income − Operating expenses
“Effective” gross income is the important word. You don't start from the rent you hope to collect — you start from the rent you realistically willcollect, after vacancy and credit loss.
Building it up, line by line
NOI comes together in three moves:
1. Gross potential income = monthly rent × 12 (+ other income)
2. Effective gross income = gross − vacancy & credit loss
3. NOI = effective gross income − operating expenses
“Other income” is anything the property earns beyond base rent — laundry, parking, storage, pet fees. It belongs in gross potential income when it's real and recurring.
A worked example
A duplex renting for $1,600 per unit, with coin laundry:
Rent = $1,600 × 2 × 12 = $38,400
Laundry income = +$1,200 → $39,600 gross
Vacancy (7%) = −$2,772 → $36,828 effective
Operating expenses = −$14,500 → $22,328 NOI
What belongs in operating expenses — and what doesn't
These are operating expenses:
- Property taxes and insurance
- Property management (even if you self-manage — value your time honestly)
- Repairs and maintenance
- Owner-paid utilities, HOA dues, landscaping, snow removal, trash
- Accounting, legal, and leasing costs
These are not operating expenses, and folding them in is the classic mistake:
- Mortgage principal and interest. Financing is excluded by definition — that's what makes NOI comparable across buyers with different loans. It's also why NOI, not cash flow, drives the cap rate.
- Capital expenditures (CapEx). A roof, a furnace, a full turn — big, occasional replacements — sit outside NOI. Many investors still reserve for them separately because they're real; they just don't belong in this particular number.
- Depreciation and income taxes. These are tax and accounting items, not cash costs of operating the building.
Why the boundary matters
NOI is powerful precisely because everyone calculates it the same way. That shared definition is what lets a lender, an appraiser, and a buyer all reason about the same property. The moment you slip a mortgage payment or a one-off capital cost into the expense column, your NOI stops being comparable to anyone else's — and the cap rate you derive from it quietly becomes fiction.
Once you have a clean NOI, it feeds directly into the two metrics most investors reach for next: the property's cap rate and, after you layer in financing, its cash-on-cash return.
Sources
Informational only, not professional advice. Real estate outcomes depend on your market, financing, and tax situation — verify every figure against your own numbers and a qualified professional before acting on a deal.