How to calculate net operating income (NOI)
Updated: October 12, 2026
Net operating income, or NOI, is what a property earns from its operations in one year after paying the costs of running it, but before loan payments and income tax. It sits at the top of almost every property analysis: the cap rate, the debt service coverage ratio and the value estimates of appraisers all start from it.
Getting the inputs right matters more than knowing the formula. This guide goes through each step, shows a complete example and lists the mistakes that most often distort the result.
Where NOI is used
Investors divide NOI by the price to get the cap rate, lenders divide it by the yearly loan payments to get the debt service coverage ratio, and appraisers divide it by a market cap rate to estimate value. Because each of these figures inherits any error in NOI, overstating it by just a few percent can make a property look noticeably cheaper, safer or more valuable than it really is.
The NOI formula
NOI = effective gross income − operating expenses
Effective gross income is the income the property can realistically collect: scheduled rent plus other income, minus an allowance for vacancy and unpaid rent. Operating expenses are the recurring costs of keeping the property running and let.
Step 1: Start with gross potential rent
List every unit and the rent it would earn if it were let for the whole year at its current contract or market rent, then add them up. Use the actual rent roll where you have one, and check that the rents are realistic for the area; rent far above the local market rarely lasts.
Step 2: Add other income
Many properties earn money besides rent: parking spaces, storage units, laundry machines, vending, late fees or costs recharged to tenants. Include only income that comes back every year. A one-off receipt, such as an insurance payout, does not belong in NOI.
Step 3: Subtract vacancy and credit loss
No property is fully let and fully paid on every day of the year. Units stay empty between tenants, and some tenants pay late or not at all. Subtract a percentage of gross income to allow for this, based on the property's own history or on local vacancy data. When in doubt, a cautious figure is better than an optimistic one.
What remains is the effective gross income (EGI).
Step 4: Subtract operating expenses
Operating expenses are the regular costs of owning and running the property. Typical items include:
- Property taxes
- Building insurance
- Property management, at a market rate even if you do the work yourself
- Repairs, maintenance, cleaning and gardening
- Utilities and service charges paid by the owner
- Advertising, tenant screening and letting fees
- Owners' association fees
- Accounting and legal costs related to the property
Use figures for a full year. If your records are monthly, multiply by twelve — or choose monthly entry in the calculator and let it do the conversion.
What to leave out
Some costs feel like property costs but do not belong in NOI, because they depend on the owner rather than on the building, or because they are not part of normal operations:
- Mortgage payments, both interest and principal
- Depreciation and amortisation, which are accounting entries rather than cash costs
- Income tax on the owner's profit
- Capital expenditure such as a new roof, new windows or a complete renovation
- The owner's personal costs, such as travel to look at other properties
Major replacements are real costs, so many investors set aside a yearly reserve for them. If you do, show it as a separate line and stay consistent: compare properties either all with a reserve or all without one.
A worked example
A small rental house is bought for 250,000. It rents for 2,100 a month, the owner allows 5% for vacancy and credit loss, and the yearly running costs are shown below.
| Item | Amount per year |
|---|---|
| Property taxes | 2,600 |
| Property management | 1,700 |
| Insurance | 1,100 |
| Leasing and advertising | 300 |
| HOA or service charges | 0 |
| Utilities paid by the owner | 600 |
| Repairs and maintenance | 1,500 |
| Annual operating expenses | 7,800 |
| Gross annual income | 25,200 |
|---|---|
| Vacancy loss | 1,260 |
| Effective gross income | 23,940 |
| Annual operating expenses | 7,800 |
| Net operating income (NOI) | 16,140 |
| Cap rate | 6.46% |
| Expense ratio | 32.58% |
With 16,140 of NOI and a price of 250,000, the cap rate is 6.46%.
NOI is not cash flow
NOI shows what the property earns. Cash flow shows what the owner keeps after paying the loan. If the house above is bought with a mortgage, the yearly loan payments are subtracted from NOI to arrive at cash flow. Two owners of the same property can therefore have the same NOI but very different cash flows, because they borrowed different amounts on different terms.
That is why our calculator shows NOI and the cap rate first and, in a separate section, the cash flow, cash-on-cash return and debt service coverage ratio once you add loan details.
Common mistakes
- Counting rent that will not be collected. Use realistic rents and always allow for vacancy.
- Copying last year's expenses without checking them. Property taxes and insurance premiums can rise sharply after a sale or a revaluation.
- Leaving out management. Your own time has a cost, and any future buyer will price it in.
- Mixing monthly and yearly figures. Put every line on the same basis before adding them up.
- Confusing capital projects with repairs. Routine repairs are operating expenses; replacing a whole building system is not.