What Is NOI in Real Estate? Formula and Examples
Published: November 12, 2026
Updated: November 12, 2026 • 8 min read
Written by
Bennett Leckrone
Writer / Reviewer / Expert
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Reviewed by
Jake Driscoll
Reviewer
Key Takeaways
- Net operating income (NOI) measures how much income a rental property generates after accounting for vacancies and operating expenses. It helps investors evaluate a property's financial performance before financing costs.
- The basic formula is NOI = effective gross income minus operating expenses. Mortgage principal and interest, income taxes, depreciation and major capital expenditures generally aren't deducted in a basic NOI calculation.
- Investors and lenders use NOI to evaluate property value, capitalization rates and debt-service coverage. However, some residential DSCR loan programs calculate qualification using rental income and the property's monthly housing payment rather than traditional NOI.
Explore your investment property loan options.
Net operating income (NOI) measures how much income a rental property generates after paying its operating expenses. In plain terms, that's the NOI meaning: what the property earns before financing. Real estate investors use NOI to evaluate a property's performance, compare investments and estimate value.
For example, a rental property with $35,400 in annual income after vacancies and $13,800 in operating expenses has an NOI of $21,600. NOI doesn't include mortgage payments or income taxes, so it isn't the money an investor keeps. It's the starting point for judging whether a property's income can support its expenses and financing.
Net Operating Income Basics
| Feature | What to Know |
|---|---|
| Definition | Income generated by a property after operating expenses |
| Formula | NOI = Effective Gross Income - Operating Expenses |
| Income Included | Rental income, parking fees, laundry income and other qualifying property revenue |
| Expenses Included | Property taxes, insurance, maintenance, property management and other operating costs |
| Expenses Generally Excluded | Mortgage principal and interest, income taxes, depreciation and major capital expenditures |
| Common Uses | Evaluating rental performance, calculating cap rates and assessing debt coverage |
| Can NOI Be Negative? | Yes, when operating expenses exceed effective gross income |
What Is Net Operating Income in Real Estate?
Net operating income is the annual income an investment property produces after the costs of running it. Start with rent and other property income, then subtract vacancy losses and operating expenses such as taxes, insurance, repairs and management.
For example, a rental property with $48,000 in annual income after vacancy adjustments and $18,000 in operating expenses has $30,000 in net operating income. That's before mortgage debt service and income taxes. Because financing isn't deducted, NOI lets you compare the real estate itself across different loans.
Why Does NOI Matter for Rental Properties?
NOI shows whether income covers operating costs, and it drives property value and financing eligibility. Say two rentals each collect $4,000 per month. One has $1,000 in monthly operating expenses, the other $1,800. Assuming no vacancies or other income, their monthly NOIs would be:
- Property A: $3,000
- Property B: $2,200
Property A earns more from the same rent. That alone doesn't make it the better investment, since price, financing, repairs and rental demand also matter.
How to Calculate Net Operating Income
Here's how to calculate NOI:
NOI = Effective Gross Income - Operating Expenses
Effective gross income is rental revenue plus other income, minus vacancies and collection losses:
Effective Gross Income = Potential Rental Income + Other Property Income - Vacancy and Collection Losses
Combining the two formulas gives you:
NOI = Potential Rental Income + Other Property Income - Vacancy and Collection Losses - Operating Expenses
Step 1: Calculate Potential Rental Income
Start with the rent the property would earn if every unit were rented all year. For a single-family rental charging $2,500 per month:
$2,500 × 12 = $30,000
For a multifamily property, add up each unit. A four-unit building with each unit renting for $1,200 per month has $57,600 in potential annual rent.
Step 2: Add Other Property Income
Some properties earn income beyond rent, such as:
- Parking fees.
- Laundry facilities.
- Storage unit rentals.
- Pet fees or other recurring charges.
- Vending machines.
- Tenant reimbursements for certain operating expenses.
A rental that collects $36,000 in annual rent and $1,200 in parking fees has $37,200 in potential annual income. Refundable security deposits don't count as rental income.
Step 3: Subtract Vacancy and Collection Losses
Units sit empty between tenants, and some tenants miss payments. A vacancy and collection loss allowance covers those shortfalls. With $36,000 in potential annual rent and a 5% vacancy and collection loss:
$36,000 × 5% = $1,800
You would subtract $1,800 from potential rent. The 5% figure is hypothetical. Base your assumption on the property's history, comparable rentals and the local market, not on one fully occupied month.
Step 4: Subtract Operating Expenses
Finally, subtract recurring operating expenses such as property taxes, insurance, maintenance and management. If a property has $35,400 in effective gross income and $13,800 in operating expenses:
$35,400 - $13,800 = $21,600
The annual NOI is $21,600.
NOI Calculation Example for a Rental Property
Suppose you're evaluating a single-family rental listed for $300,000. It rents for $3,000 per month and earns $1,200 a year from parking and other fees. Assume a 5% vacancy and collection loss and the operating expenses below.
| Income or Expense | Annual Amount |
|---|---|
| Potential Rental Income ($3,000 × 12) | $36,000 |
| Other Property Income | $1,200 |
| Vacancy and Collection Losses | -$1,800 |
| Effective Gross Income | $35,400 |
| Property Taxes | -$4,200 |
| Property Insurance | -$1,800 |
| Repairs and Maintenance | -$2,400 |
| Property Management | -$3,000 |
| Owner-Paid Utilities | -$1,200 |
| HOA Dues | -$1,200 |
| Total Operating Expenses | -$13,800 |
| Net Operating Income | $21,600 |
The property's annual NOI is $21,600, or an average of $1,800 per month. All figures are hypothetical. The example excludes mortgage payments, major capital expenditures and income taxes.
What Counts as an Operating Expense in NOI?
Operating expenses are the costs of running and maintaining an income-producing property. The exact list depends on the property type and the leases.
Property Taxes
Property taxes reduce NOI. A $4,800 annual tax bill cuts NOI by $4,800, even if you pay it through an escrow account with your lender. Taxes change after reassessments, so don't assume the seller's bill will carry over after a sale.
Property Insurance
Landlord insurance, commercial property coverage and other required policies are operating expenses. An annual premium of $2,000 reduces NOI by $2,000, and premiums can rise at renewal.
Repairs and Maintenance
Routine repairs and maintenance count toward operating expenses. Examples include:
- Fixing plumbing leaks.
- Servicing heating and cooling equipment.
- Replacing damaged fixtures.
- Completing routine landscaping.
- Maintaining common areas.
- Performing ordinary cleaning and upkeep.
Separate routine maintenance from major capital improvements. Repairing a small roof leak is an operating expense. Replacing the entire roof is a capital expenditure.
Property Management
Management fees for rent collection, repairs and tenant communication are operating expenses. If you self-manage, investors and lenders often add an estimated fee anyway. Otherwise the property looks more profitable than a professionally managed one.
Utilities and Association Dues
Owner-paid utilities, such as water, sewer, electricity or gas, count as operating expenses. So do recurring homeowners association (HOA) dues or condominium assessments. Utilities tenants pay directly don't count.
Some commercial tenants reimburse the landlord for taxes or maintenance. Treat those reimbursements and the matching expenses consistently so you don't double-count or omit them.
What Expenses Are Not Included in NOI?
Several major costs are left out of basic NOI, which is why it can far exceed the cash an investor keeps.
Mortgage Principal and Interest
Mortgage payments aren't operating expenses. Principal and interest together make up debt service: principal reduces the loan balance, and interest is a financing cost. Two identical rentals with different loans have the same NOI, even though their owners' mortgage payments differ.
Income Taxes
The investor's federal and state income taxes aren't part of NOI. Property taxes are a cost of operating the real estate. Income taxes depend on the owner's broader finances.
Depreciation and Amortization
Depreciation and amortization aren't included in NOI. They spread costs over time for tax or accounting purposes and aren't current cash expenses. That's one reason NOI differs from a rental's taxable income.
Major Capital Expenditures
A new roof, a new HVAC system or a major renovation sits outside ordinary operating expenses. Lenders, however, often build replacement reserves into their underwriting. The Office of the Comptroller of the Currency's commercial real estate lending guidance describes an underwritten NOI that includes reserves for replacing capital items. Fannie Mae's multifamily framework instead defines net cash flow as NOI less its underwritten replacement reserve.
The key distinction is a project's actual cost versus a lender's estimated annual reserve for future replacements. When comparing properties or loan offers, confirm whether reserves are already in the NOI figure.
NOI vs. Cash Flow: What's the Difference?
NOI is operating income before financing. Cash flow is what's left after debt payments too. Take the rental with $21,600 in annual NOI and assume the investor pays $1,500 per month in mortgage principal and interest. Annual debt service would be:
$1,500 × 12 = $18,000
Subtracting those payments from NOI gives:
$21,600 - $18,000 = $3,600
| Calculation | Annual Amount |
|---|---|
| Net Operating Income | $21,600 |
| Mortgage Principal and Interest | -$18,000 |
| Cash Remaining Before Other Excluded Costs | $3,600 |
Only $3,600 of the $21,600 NOI remains after the mortgage, or about $300 per month before capital expenditures and income taxes. Actual cash on hand will vary, since income and expenses don't arrive evenly.
Can a Property Have Positive NOI but Negative Cash Flow?
Yes. A rental with $24,000 in annual NOI and $27,000 in annual mortgage principal and interest has positive NOI but a $3,000 cash shortfall. Positive NOI doesn't guarantee positive cash flow.
How Do Lenders Use NOI for DSCR Loans?
Commercial lenders use NOI to test whether a property can cover its debt service. The standard measure is the debt-service coverage ratio (DSCR):
DSCR = Net Operating Income ÷ Annual Debt Service
For example, suppose a property has $21,600 in annual NOI and $18,000 in annual debt service.
$21,600 ÷ $18,000 = 1.20
Its DSCR is 1.20: $1.20 in NOI for each $1 of debt service. At 1.00, NOI equals debt service, and below 1.00 it falls short. Lenders set a minimum DSCR that varies by program and property type.
Do Residential DSCR Loans Use NOI?
Not always. Many residential DSCR programs for one- to four-unit properties divide qualifying rent by the monthly housing payment: principal, interest, taxes, insurance and association dues (PITIA).
Residential DSCR = Qualifying Monthly Rent ÷ Qualifying Monthly Housing Payment
For example, suppose a rental property has $3,000 in qualifying monthly rent and the lender measures its housing payment at $2,100.
$3,000 ÷ $2,100 = 1.43
The DSCR is about 1.43. Unlike the NOI-based method, it doesn't deduct vacancy, maintenance or management from rent first.
Residential DSCR rules are lender-specific. Some use lease income and others use appraiser-supported market rent. See DSCR loan qualification requirements for how lenders evaluate rent, credit, down payments and reserves.
How Do NOI and DSCR Affect Mortgage Qualification?
Commercial lenders analyze historical NOI, projected rent, vacancy and operating expenses. Many calculate a stabilized NOI from market assumptions rather than the latest operating statement.
Smaller residential investment properties are underwritten differently. Conventional investment-property mortgages look at the borrower's overall finances and qualifying rental income from the property under agency rules. Residential DSCR programs focus on the property's rent relative to its qualifying payment.
The differences between DSCR and conventional investment-property financing extend to documentation and reserves. A DSCR calculator estimates rental coverage with the simplified residential formula, not a full NOI analysis.
How Is NOI Used to Calculate Cap Rate?
The capitalization rate, or cap rate, compares annual net operating income with a property's value or price:
Cap Rate = Annual NOI ÷ Property Value × 100
For example, take the rental property with $21,600 in annual NOI and a $300,000 purchase price.
$21,600 ÷ $300,000 × 100 = 7.2%
Its cap rate is 7.2%. Because it ignores financing, cap rate compares properties on equal footing. It isn't cash-on-cash return, though, since mortgage payments, capital costs and taxes affect what you actually earn.
What Is a Good NOI or Cap Rate?
No single number works. A $20,000 annual NOI could be strong for an inexpensive rental but weak for a multimillion-dollar building.
Cap rates vary by property type, location, condition and risk. A higher cap rate means more income per dollar of price, but it can also signal risk. An older property needing major repairs might show a higher cap rate than a newer building in a stable market.
Can You Estimate Property Value Using NOI?
Yes. The income capitalization approach divides NOI by a market-supported cap rate:
Estimated Property Value = Annual NOI ÷ Cap Rate
For example, suppose a property generates $30,000 in stabilized annual NOI and comparable market evidence supports a 6% cap rate.
$30,000 ÷ 0.06 = $500,000
The indicated value is $500,000. The cap rate must come from market evidence, not from picking a rate that produces the value you want. Appraisers also weigh comparable sales, condition and lease terms, and the method matters most for commercial and multifamily properties.
What Is the Difference Between NOI and Gross Rental Income?
Gross rental income is rent before expenses. NOI subtracts operating costs and expected vacancy. A property with $48,000 in annual potential rent might have an NOI of $27,000. Judging by gross rent alone makes a property look more profitable than it is.
NOI vs. Net Profit
Net profit also subtracts financing costs, depreciation and income taxes, which NOI excludes. Depreciation deductions, for example, lower taxable income without changing NOI. Analyze NOI, profit and cash flow separately.
What Is a Good NOI for a Rental Property?
There's no minimum NOI for every rental. Judge it against price, risk and financing costs. Say two properties each generate $25,000 in annual NOI. One costs $250,000 and the other $500,000. Their cap rates would be:
- $250,000 property: 10% cap rate.
- $500,000 property: 5% cap rate.
That doesn't settle which is better. Maintenance needs, tenant risk and appreciation prospects still matter.
How Can You Increase a Rental Property's NOI?
NOI rises when revenue increases or operating costs fall.
Increase Rental Income
Raise rent at lease renewal when the market supports it, within the lease and local law. Parking, storage or other services can add revenue. Weigh any increase against tenant turnover and vacancy.
Reduce Vacancy
A rental home charging $2,000 per month loses $4,000 in potential rent if it sits empty for two months. Faster turnover, good upkeep and market-rate rents support occupancy. Use a lower vacancy assumption only when evidence supports it.
Manage Operating Expenses
Shopping insurance, fixing recurring maintenance problems or improving energy efficiency can cut costs. Skimping on maintenance backfires, though. Deferred repairs mean bigger bills later and a less valuable property.
What Are Common NOI Calculation Mistakes?
NOI misleads when income is overstated or expenses are missing. Common mistakes include:
- Assuming every unit will be occupied and every tenant will pay rent on time.
- Using advertised rents that exceed what the local market supports.
- Forgetting property taxes or assuming the seller's current tax bill will remain unchanged.
- Excluding property management costs because the owner handles the work personally.
- Ignoring routine repairs, utilities or recurring association dues.
- Subtracting mortgage payments when calculating basic NOI.
- Double-counting vacancies or tenant reimbursements.
- Confusing major capital expenditures with ordinary operating expenses.
- Comparing properties that use different reserve or underwriting assumptions.
For example, a listing might advertise $3,000 per month in rent, or $36,000 annually. With $12,000 in operating expenses and $2,000 in vacancy losses, its NOI is $22,000, not $36,000.
Should You Use Actual or Projected NOI?
Use both. Actual NOI reflects a past period, while projected NOI estimates future rents, vacancy and costs. A recently renovated property may show low historical NOI because units sat empty, and its projection assumes they'll rent at market rates.
Compare the seller's projections with historical statements. Lenders often build their own stabilized NOI instead of accepting the seller's estimate.
The Bottom Line
Net operating income is a rental property's income after vacancy and operating expenses such as taxes, insurance, maintenance and management. It excludes mortgage payments, income taxes and depreciation, though lenders may adjust for replacement reserves. Use NOI to compare properties, calculate cap rates and test DSCR, but pair it with debt service, repair costs and realistic rent assumptions to see your true cash flow.
Frequently Asked Questions
What Does NOI Stand For?
NOI stands for net operating income. It's the income a property generates after operating expenses, before mortgage payments.
What Is NOI in Real Estate?
Net operating income measures an income-producing property's operating performance. It equals effective gross income minus operating expenses and is used to evaluate rentals, calculate cap rates and assess debt coverage.
What Is the Net Operating Income Formula?
NOI = Effective Gross Income - Operating Expenses. Effective gross income is rental and other property income after vacancy and collection losses.
How Do You Calculate NOI on a Rental Property?
Add potential annual rent and other property income, then subtract vacancy and collection losses. Subtract operating expenses such as taxes, insurance, management and maintenance, and the remainder is annual NOI.
Is Mortgage Interest Included in NOI?
No. Mortgage interest is a financing expense, not an operating expense. Principal payments are excluded too.
Are Property Taxes Included in NOI?
Yes. Property taxes are operating expenses and reduce NOI. The owner's income taxes are not included.
Is Property Insurance Included in NOI?
Yes. Premiums for insuring an income-producing property are operating expenses and reduce NOI.
Does NOI Include Vacancy?
Yes. A stabilized NOI accounts for expected vacancy and collection losses in effective gross income. Don't subtract them again as an operating expense.
Does NOI Include Property Management Fees?
Yes. Management fees are operating expenses, and many investors and lenders include an estimated fee even when the owner self-manages.
Does NOI Include Capital Expenditures?
Major capital expenditures are excluded from basic NOI. Some lenders fold replacement reserves into underwritten NOI, while others deduct them separately to get net cash flow.
Is NOI the Same as Cash Flow?
No. NOI is operating income before financing costs, while cash flow subtracts debt payments and other cash expenses. A property can have positive NOI and negative cash flow.
Can NOI Be Negative?
Yes, when operating expenses exceed effective gross income. A property with $18,000 in annual effective income and $22,000 in operating expenses has an NOI of negative $4,000.
What Is a Good NOI?
No universal NOI amount makes a property a good investment. Judge it against the property's value, market and expenses, alongside cap rate, cash flow and financing costs.
How Is NOI Used to Calculate Cap Rate?
Divide annual NOI by the property's value or price and multiply by 100. A property with $24,000 in annual NOI and a $400,000 value has a 6% cap rate.
How Does NOI Affect DSCR?
In commercial lending, DSCR is NOI divided by annual debt service. Many residential DSCR programs instead divide qualifying monthly rent by the qualifying monthly housing payment.
Is NOI the Same as Taxable Rental Income?
No. Taxable rental income follows tax rules and deducts items like depreciation and mortgage interest. NOI excludes those items, so the two figures can differ substantially.
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