Net operating income (NOI) is the yearly income a rental property generates after operating expenses are subtracted, but before mortgage payments, income taxes, or depreciation come out.
The formula is straightforward: NOI = Effective Gross Income – Operating Expenses.
It’s the number lenders, appraisers, and investors use most often, because it measures how a property performs on its own, independent of how it’s financed. Landlords typically calculate NOI monthly and annually, then use it to work out cap rate, qualify for refinancing, and compare one property against another.
What Is NOI in Real Estate?
Net operating income measures how much money a rental property earns from operations before financing costs enter the picture. It strips out anything related to how the property was purchased, so a cash buyer and a buyer with a 75% mortgage calculate the exact same NOI on the exact same building. That’s the whole point of the metric: it isolates the asset’s performance from the owner’s personal financing decisions.
NOI matters for three practical reasons. Lenders use it to size a loan, since most commercial and small multifamily underwriting runs off a debt service coverage ratio built on NOI. Freddie Mac’s Multifamily Seller/Servicer Guide defines NOI the same way most lenders do: income from a property’s operations available for debt repayment and owner return, after vacancy and expenses, but before debt service. Appraisers and buyers use it to back into a property’s market value through the cap rate formula. And landlords use it internally as a health check, since a property with flat or declining NOI is a warning sign long before cash flow or a bank balance shows the same problem.
NOI is calculated from a property’s actual operating performance, not what the seller’s listing sheet claims it should earn. That distinction matters enough that it gets its own section on mistakes below, since assuming full occupancy and best-case expenses is one of the most common ways new investors overpay for a deal.
How to Calculate NOI
Calculating NOI takes three steps: total the income, subtract vacancy and credit loss to get Effective Gross Income, then subtract every operating expense that isn’t financing-related.
Step 1: Add up gross potential income.
Start with the rent every unit would generate if fully occupied for the year, plus any other property income like laundry, parking, storage, or pet fees.
Step 2: Subtract vacancy and credit loss to get Effective Gross Income (EGI).
Even well-run properties see some turnover and occasional missed rent. Subtracting a realistic vacancy and credit loss figure from gross potential income gives you EGI, the number that reflects what the property is likely to collect.
Step 3: Subtract operating expenses.
This includes property taxes, insurance, repairs and maintenance, property management fees, landlord-paid utilities, and similar recurring costs. It does not include mortgage principal or interest, income taxes, depreciation, or capital expenditures like a roof replacement. Those all happen below the NOI line. Pulling these numbers from a monthly profit and loss statement rather than reconstructing them at tax time keeps the operating expense side accurate.
| NOI component | Included? |
|---|---|
| Rental income | Yes |
| Other income (laundry, parking, fees) | Yes |
| Vacancy and credit loss | Subtracted |
| Property taxes and insurance | Subtracted (expense) |
| Repairs, maintenance, management fees | Subtracted (expense) |
| Mortgage principal and interest | No |
| Income taxes and depreciation | No |
| Capital expenditures (new roof, major renovation) | No |
Real-World NOI Example
Consider a landlord like Priya, who owns a four-unit building in Ohio, a common ownership scenario rather than a specific customer story. Each unit rents for $1,150 a month, and the building also brings in $600 a year from a shared coin laundry setup.
Income:
- Gross potential rent: 4 units x $1,150 x 12 = $55,200
- Other income (laundry): $600
- Vacancy and credit loss (5%): -$2,760
- Effective Gross Income: $53,040
Operating expenses:
- Property taxes: $6,200
- Insurance: $2,100
- Repairs and maintenance: $3,800
- Property management fee (8% of EGI): $4,240
- Landlord-paid utilities (common areas): $1,450
- Landscaping and snow removal: $900
- Total operating expenses: $18,690
NOI = $53,040 – $18,690 = $34,350
Notice that Priya’s mortgage payment never enters this calculation. If she refinances into a lower rate next year, her cash flow improves, but her NOI stays exactly $34,350, since NOI reflects the building’s operating performance, not her loan terms. That’s what makes it comparable across owners, lenders, and deals in a way cash flow never quite is.
Landlords who track expenses and rent collection in one place, rather than reconstructing numbers from a shoebox of receipts at tax time, get a much more reliable read on this figure. RentRedi’s Portfolio Performance dashboard calculates NOI automatically from the transactions already logged in the platform, pulling operating expenses directly from accounting and maintenance records so the number updates as rent gets collected and bills get paid, instead of getting rebuilt from scratch once a year.
Common Mistakes to Avoid
Confusing NOI with cash flow
NOI and cash flow are related but not interchangeable. NOI stops before financing costs; cash flow is what’s left after the mortgage payment too. A property can have solid NOI and still produce negative cash flow if the debt service is high, which is a leverage problem, not an operating problem.
Leaving mortgage payments in the calculation
This is the single most common NOI error. Mortgage principal and interest belong below the NOI line, not inside it. Including them understates the property’s real operating performance and throws off every downstream calculation that depends on NOI, including cap rate.
Ignoring vacancy and credit loss
Calculating NOI off 100% occupancy inflates the number and misrepresents what the property will collect. Even strong markets see some turnover between leases, and building in a realistic vacancy assumption, rather than a best-case one, keeps the figure honest.
Mixing in capital expenditures
A new roof, a full kitchen renovation, or a major system replacement is a capital expense, not an operating expense. Routine repairs and maintenance belong in NOI; large, infrequent capital projects don’t, even though both can appear on the same bank statement.
Relying on pro forma numbers instead of actual performance
A seller’s pro forma NOI reflects projected, best-case income and expenses, not verified operating history. Underwriting a purchase off pro forma NOI instead of trailing twelve-month actuals is one of the more common ways investors overpay for a property that can’t support the price.
NOI is the foundation for two other metrics landlords calculate constantly: cap rate, which divides NOI by a property’s market value, and cash-on-cash return, which measures return on the actual cash invested after financing. Getting NOI right first is what makes both of those numbers trustworthy.
FAQ
What is a good NOI in real estate?
There’s no single “good” NOI dollar figure, since it depends entirely on property size, market, and rent roll. What matters more is the trend and the resulting cap rate. A property with rising NOI year over year, and a cap rate that lines up with comparable properties in the same market, is generally considered healthy.
Does NOI include the mortgage payment?
No. Mortgage principal and interest are excluded from NOI entirely. NOI measures a property’s operating performance independent of financing, which is why the same property produces the same NOI whether it’s owned free and clear or financed with a large loan.
What’s the difference between NOI and cash flow?
NOI is income after operating expenses but before financing. Cash flow goes one step further and subtracts the mortgage payment too. A property can have positive NOI and still have negative cash flow if debt service is high relative to the property’s income.
What’s the difference between NOI and cap rate?
NOI is a dollar figure representing annual operating income. Cap rate is a percentage, calculated by dividing NOI by the property’s current market value. Cap rate uses NOI as an input, so an inaccurate NOI produces an inaccurate cap rate.
How does vacancy affect NOI?
Vacancy reduces Effective Gross Income, which lowers NOI directly, since less rent is being collected against the same fixed expenses like taxes and insurance. Landlords typically build a vacancy and credit loss assumption (often 3-8%, depending on the market) into their NOI calculation rather than assuming full occupancy.
Is NOI the same as profit?
Not exactly. NOI is closer to operating profit than net profit, since it still excludes financing costs, income taxes, and capital expenditures. A property’s true bottom-line profit, after every cost including the mortgage, is closer to cash flow than to NOI.
What is pro forma NOI?
Pro forma NOI is a projected figure, usually based on market rents and estimated expenses rather than a property’s actual, verified operating history. It’s common in seller listings and new-construction underwriting, but it should be treated as an estimate, not a substitute for trailing actual NOI once a property is generating real income and expense data.
Conclusion
NOI is the number that tells landlords whether a property is a good investment, separate from how it happens to be financed. Getting it right means being disciplined about what belongs above the line (rental and other income, minus vacancy and operating expenses) and what stays below it (mortgage payments, taxes, depreciation, and capital expenditures).
Next steps:
- Pull your last 12 months of actual rent collected and operating expenses for one property and calculate its NOI using the formula above.
- Compare that NOI against last year’s, or against a comparable property in the same market, to see whether performance is improving or slipping.
- Use that NOI figure to calculate cap rate on your next potential purchase, rather than relying on a seller’s pro forma numbers.
See NOI calculated automatically as rent comes in and expenses get logged, instead of rebuilding it by hand every year.