What Is Net Operating Income?
Net operating income (NOI) is a property's yearly income from rent and other sources minus its operating expenses, before mortgage payments, depreciation and income taxes. It is used when valuing and financing rental property, and matters because cap rate, DSCR and loan size are all calculated from it.
Net Operating Income in plain English
NOI is the money a rental property earns in a year after paying the bills to run it, but before the mortgage. It answers one question: how much does the building itself make?
Rent collected, plus fees such as laundry or parking, minus taxes, insurance, repairs, management and owner-paid utilities - what remains is NOI.
Advanced explanation
NOI = effective gross income (potential rent and other income, less vacancy and credit loss) minus operating expenses such as taxes, insurance, management, repairs and maintenance, and owner-paid utilities. It excludes debt service, depreciation and income taxes, and under many conventions capital expenditures and leasing costs - which is why reserves and CapEx are often shown below NOI.
Formula
NOI = Gross Rental Income − Operating Expenses- Gross Rental Income
- Rent actually expected to be collected after vacancy and credit loss, plus other property income.
- Operating Expenses
- Costs of running the property: taxes, insurance, repairs and maintenance, management, owner-paid utilities and HOA dues.
Related forms: Effective Gross Income = Potential Rent − Vacancy and Credit Loss + Other Income; NOI = Effective Gross Income − Operating Expenses.
Excludes mortgage principal and interest, depreciation and income taxes.
Worked example
NOI for a single-family rental
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Market rent
- $2,600 a month
- Vacancy and credit loss
- 5%
- Other income (laundry, pet fees)
- $600 a year
- Property tax
- $3,600 a year
- Insurance
- $1,500 a year
- Repairs and maintenance
- $2,400 a year
- Property management (8% of collected income)
- $2,419 a year
- Owner-paid utilities
- $600 a year
| Step | Calculation | Result |
|---|---|---|
| 1. Gross potential rent | $2,600 × 12 | $31,200 |
| 2. Effective gross income | $31,200 − $1,560 vacancy + $600 other income | $30,240 |
| 3. Operating expenses | $3,600 + $1,500 + $2,400 + $2,419 + $600 | $10,519 |
| 4. Net operating income | $30,240 − $10,519 | $19,721 |
Annual NOI: $19,721. The property produces $19,721 a year, about $1,643 a month, before any mortgage payment. That figure feeds cap rate, DSCR and the lender's view of the loan.
What this calculation leaves out
- Mortgage principal and interest, depreciation and income taxes are excluded by definition.
- Many investors also deduct a capital-expenditure reserve; when they do, say so, because it is not a universal convention.
- Use market-rate management even if you plan to self-manage, so the NOI reflects the property rather than your time.
Try it: Net Operating Income with your own numbers
Interactive and illustrative: change any value and the results update instantly in your browser. The figures come from the same engines as REAIXO's full calculators.
From rent to cash flow: the NOI waterfall
Gross rent shrinks at every step: vacancy, operating expenses, the mortgage and reserves. NOI is the property's income before financing; cash flow is what you keep.
- Net operating income
- $23,454
- Per year, before the mortgage
- Estimated cash flow
- $3,064
- $255 a month
- Cap rate on the price
- 7.33%
Show the numbers as a table
| Step | Per year | Per month |
|---|---|---|
| Gross scheduled income | $36,000 | $3,000 |
| Vacancy and credit loss | −$1,800 | −$150 |
| Effective gross income | $34,200 | $2,850 |
| Operating expenses | −$10,746 | −$896 |
| Net operating income | $23,454 | $1,955 |
| Debt service (principal and interest) | −$18,680 | −$1,557 |
| Capital-expenditure reserve | −$1,710 | −$143 |
| Estimated cash flow | $3,064 | $255 |
Formula
Effective gross income = Gross scheduled income − VacancyNOI = Effective gross income − Operating expensesCash flow = NOI − Debt service − Capital-expenditure reserveAssumptions
- 30-year fixed loan, no points; one unit with no other income, HOA or utilities.
- Vacancy is taken off gross rent; management, maintenance and the capital-expenditure reserve are a share of collected rent.
- The capital-expenditure reserve sits below NOI: it is cash set aside, not an operating expense.
- Income taxes, depreciation and appreciation are left out.
Cap rate matrix: NOI against value
Cap rate starts from NOI - income after vacancy and operating expenses - never from gross rent. The matrix shows how the rate moves when NOI or the value changes.
- Net operating income
- $24,000
- Effective gross income $34,200
- Cap rate
- 6.00%
- NOI ÷ value
- Gross yield (not the cap rate)
- 9.00%
- Rent ÷ value ignores expenses
| NOI \ Value | $360,000 | $380,000 | $400,000 | $420,000 | $440,000 |
|---|---|---|---|---|---|
| $21,600 | 6.00% | 5.68% | 5.40% | 5.14% | 4.91% |
| $24,000 (yours) | 6.67% | 6.32% | 6.00% ◀ | 5.71% | 5.45% |
| $26,400 | 7.33% | 6.95% | 6.60% | 6.29% | 6.00% |
Formula
NOI = Gross income × (1 − Vacancy %) − Operating expensesCap rate = NOI ÷ Property value × 100Assumptions
- Operating expenses exclude the mortgage, depreciation and capital improvements.
- Cap rate ignores financing; compare it only with properties of a similar type and location.
Why it matters
NOI is the input used to calculate cap rate and is a core measure of a rental property's profitability independent of financing.
NOI is the number most valuation and lending math starts from. It drives the cap-rate value, the DSCR a lender calculates and the loan amount a property can support.
Because value is often NOI divided by a cap rate, a lasting $100-a-month expense saving can add five figures of value.
What it means for you
How does it affect an investment?
Higher NOI raises value, improves DSCR and increases the loan a property can support; this is why investors focus on raising rents and controlling expenses.
What professionals should verify
Ask for trailing-12-month operating statements and rent rolls, and reconcile them with bank deposits before relying on a seller's NOI.
Common mistakes
- Subtracting the mortgage payment - debt service is never an operating expense.
- Using full rent with no allowance for vacancy or non-payment.
- Leaving out management because you self-manage; buyers and lenders will add it back.
- Mixing one-time capital projects (a new roof) into one year's operating expenses, or ignoring them entirely.
Compare and common questions
Net Operating Income: frequently asked questions
Does NOI include the mortgage payment?
No. NOI is calculated before principal and interest, so it describes the property, not the financing. Subtract debt service from NOI to get cash flow.
Is depreciation an operating expense in NOI?
No. Depreciation is a tax deduction for the wear of the building, not a cash operating cost, so it is left out of NOI. The IRS explains rental depreciation in Publication 527.
Are capital expenditures part of NOI?
Usually not. Major replacements are typically shown below NOI as a reserve, but practice varies - always check how an NOI figure treats them.
What is the difference between NOI and cash flow?
Cash flow is NOI minus debt service and any reserves. Two buyers of the same property have the same NOI but different cash flow if their loans differ.
Go deeper
Recommended calculators
Run Net Operating Income with your own numbers:
Where it fits
- Investing, Acquisition: before this, Cap Rate; next, Cash-on-Cash Return.
More Investing Terms
Recommended next step
Build NOI line by line and see cash flow after the mortgage.
Rental cash flow calculator →Apply it to a specific property: Cash flow analysis.
Sources and review
- Publication 527, Residential Rental Property, Internal Revenue Service. Supports: Depreciation of residential rental property is a tax deduction, separate from operating expenses.
Where this applies: Industry convention - no single regulatory definition. Lenders and appraisers may define inputs differently.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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