From rent collected to net operating income
NOI is built in two steps. First you work out how much income the property realistically earns. That is not simply the rent on the lease: you start from the gross rental income, add any other income such as parking or laundry, and then subtract an allowance for vacancy and credit loss — the rent you will not actually collect because units sit empty or tenants fail to pay. The result is effective gross income, a grounded figure rather than a best-case one. Second, you subtract the operating expenses of running the property. What survives is the net operating income.
The NOI formula
Effective gross income = (gross rental income + other income) − vacancy & credit loss
NOI = Effective gross income − Operating expenses
Vacancy is applied to potential rental income so the income side reflects what is truly collected. Operating expenses are then deducted to leave the property’s operating profit, measured before any financing.
Worked example
Take a rental property earning $60,000 a year in rent plus $2,000 of other income, with a 5% vacancy allowance and $20,000 of operating expenses:
| Step | Amount |
|---|---|
| Gross rental incomeannual rent at full occupancy | $60,000 |
| + Other incomeparking, laundry, and fees | $2,000 |
| − Vacancy & credit loss5% of gross rental income — rent that never actually arrives | $3,000 |
| = Effective gross incomewhat the property realistically collects | $59,000 |
| − Operating expensestaxes, insurance, management, and repairs — no mortgage | $20,000 |
| = Net operating incomethe operating profit before any financing or income tax | $39,000 |
Computed with this calculator's default settings — open the tool above and you'll see the same numbers, then adjust the inputs to match your property.
What counts as an operating expense — and what does not
The line NOI draws is deliberate, and getting it right is what makes the number comparable across properties. Operating expenses are the recurring costs of keeping the building running and let. Everything tied to how the property is financed, to its tax treatment, or to large one-off reinvestment is held back below the NOI line.
- Included as operating expenses: property taxes, insurance, property management, repairs and maintenance, owner-paid utilities, and HOA dues. These are the ongoing costs of operating the asset.
- Excluded from NOI: the mortgage and all debt service, capital expenditures (capex such as a new roof or HVAC), depreciation, and income tax. NOI stops before each of these on purpose.
- Why the split matters. Because NOI comes before financing, the same building produces the same NOI whether it is bought with cash or heavily mortgaged — so properties can be compared independent of how any particular buyer chooses to finance them.
Why NOI is the foundation of valuation
Net operating income is the single most important number in income-property analysis because almost everything else is built on top of it. Divide NOI by the property’s value and you get the capitalization rate — the unlevered yield the market uses to price real estate — which you can explore with ourcap rate calculator. Subtract annual debt service from NOI and you arrive at the cash flow an owner actually pockets, the basis for thecash-on-cash return. Because NOI sits before financing, it cleanly separates the question of how good the property is from the question of how it is paid for.
Frequently asked questions
What is net operating income?
Net operating income, or NOI, is the annual income a property generates from its operations after operating expenses but before any financing or tax. You start with effective gross income — gross rental income plus other income, reduced by vacancy and credit loss — and then subtract the costs of running the property. What remains is the profit the asset throws off purely from being operated, independent of how it is paid for or who owns it.
How do you calculate NOI?
First find effective gross income: add gross rental income and any other income, then subtract vacancy and credit loss. Next total the operating expenses — property taxes, insurance, property management, repairs and maintenance, utilities, and any HOA dues. Subtract those expenses from effective gross income and the result is NOI. In short, NOI equals effective gross income minus operating expenses, with vacancy already taken out of the income side.
What expenses are included in NOI?
Operating expenses are the recurring costs of keeping the property running and rentable: property taxes, insurance, property management fees, repairs and maintenance, utilities the owner pays, and HOA dues. These are the only expenses deducted to reach NOI. Costs tied to financing the purchase, replacing major components, or the owner’s tax bill are deliberately left out so the figure reflects the property itself rather than the owner’s circumstances.
Is the mortgage included in NOI?
No. Mortgage payments and all other debt service are excluded from net operating income. NOI is measured before financing, so the same property produces the same NOI whether it is bought with cash or with a large loan. The mortgage only enters the picture afterward, when you subtract debt service from NOI to arrive at the cash flow an owner actually keeps.
Why does NOI exclude financing?
NOI excludes financing so that a property can be judged on its own merits rather than on the buyer’s loan terms. Two investors could finance the identical building very differently, yet the building’s earning power has not changed. By stopping before mortgage interest, capital expenditures, depreciation, and income tax, NOI gives a clean, comparable measure of operating performance that the market can use to value the asset.
Disclaimer: This calculator is foreducation and illustration only. NOI depends on the income, vacancy, and expense assumptions you enter, and real properties carry costs and risks not captured here. The figures it produces are not valuations of any specific property, and nothing here is investment, tax, or trading advice.