How to Calculate Net Operating Income (NOI) for a Rental Property
Net operating income (NOI) is what a rental property earns from operations before financing and income tax. It's the basis for cap rate and the cleanest way to compare properties regardless of how each one is financed.
The formula
NOI = effective rental income − operating expenses
Effective rental income is the rent you actually expect to collect: gross scheduled rent, minus vacancy and credit loss, plus other income such as laundry, parking or pet fees.
What counts as an operating expense
- Property taxes and insurance
- Repairs and maintenance
- Property management fees
- Utilities you pay, HOA dues
- Landscaping, snow removal, pest control
- Advertising, legal and accounting costs for the property
What does NOT go into NOI
- Mortgage payments, both principal and interest. Financing comes after NOI.
- Depreciation, a tax deduction rather than a cash operating cost
- Capital improvements such as a new roof. Many investors set aside a capital reserve and show it separately.
- Your income tax
Worked example
| Gross scheduled rent | $1,600 × 12 = $19,200 |
| Vacancy allowance (5%) | −$960 |
| Effective rental income | $18,240 |
| Taxes, insurance, repairs, management | −$6,400 |
| NOI | $11,840 |
The vacancy rate and expense figures here are illustrations. Use your own records and local numbers.
NOI vs cash flow
Cash flow = NOI − debt service (and any capital reserve). If the property above had $9,000 a year in mortgage payments, cash flow would be $2,840. Two identical buildings can have the same NOI and very different cash flow because of their financing. NOI judges the property; cash flow judges the deal.
Track it per property, from real numbers
Estimate NOI before you buy, then calculate the actual NOI from your ledger each year. The gap between the two is the most useful thing a landlord can learn. For return measures built on NOI, see cap rate and cash-on-cash return.
Our Rental Property Tracker keeps one ledger for all your properties and shows NOI and cash flow for each property, cap rate and cash-on-cash, and rent collected vs expected.
General information, not investment or tax advice.
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