Net operating income (NOI) for rental property
Skip the mathWork out NOI and cap rate with the calculatorNet operating income (NOI) is the money a rental property brings in over a year after the costs of running it, and before the mortgage. It is the starting point for the cap rate, the DSCR a lender checks, and your cash flow.
The formula
NOI = Rent collected + other income - operating expenses
Rent collected is the rent you expect to receive in a year after vacancy and unpaid rent, not the full rent on the lease. Other income is anything else the property earns: parking, laundry, pet rent, late fees.
What counts as an operating expense
| Included in NOI | Not included in NOI |
|---|---|
| Property tax | Mortgage principal and interest |
| Insurance | Depreciation |
| HOA dues | Income tax |
| Utilities the landlord pays | The down payment and closing costs |
| Repairs and maintenance | Big improvements (often handled as a reserve) |
| Property management fees | Your own time, unless you pay yourself |
| Advertising, screening, legal and accounting |
Example
A single-family house rents for $2,500 a month.
| Line | Yearly |
|---|---|
| Rent on the lease ($2,500 x 12) | $30,000 |
| Vacancy, 5 % | -$1,500 |
| Rent collected | $28,500 |
| Property tax | -$3,600 |
| Insurance | -$1,500 |
| Repairs, 8 % of rent collected | -$2,280 |
| Reserve for big repairs, 5 % | -$1,425 |
| Net operating income | $19,695 |
On a $300,000 price that is a 6.57 % cap rate. With a $240,000 loan at 7 % (about $19,161 a year in payments), only $534 a year is left as cash flow: a good NOI does not guarantee a good deal once the loan is added.
Why lenders and buyers use NOI
Because it leaves out financing, NOI lets you compare properties on equal terms and estimate what a building is worth: value = NOI / cap rate. Lenders use it to see how safely the property can carry a loan. Raising NOI, by raising rent, cutting costs or adding income, raises the value of the property at the same cap rate.
Common mistakes
- Using the full rent. Leave room for vacancy and tenants who pay late or not at all.
- Using the seller’s property tax. The assessment may reset after the sale. Check the rate in your county.
- Leaving out repairs. Every rental needs them. A listing with no repair line is showing an NOI that will not hold.
Questions
Is the mortgage included in net operating income?
No. NOI measures what the property earns before financing, so two investors with different loans get the same NOI for the same building. Mortgage payments come off after NOI to get cash flow.
Is NOI the same as profit?
No. NOI is before mortgage payments, depreciation and income tax. Taxable profit subtracts mortgage interest and depreciation; cash flow subtracts the full mortgage payment.
Do capital expenditures count in NOI?
Strictly, big one-off improvements such as a new roof are capital expenses, not operating expenses. Many small landlords still subtract a yearly reserve for them, which gives a more cautious NOI. Be consistent when you compare properties.
What is a good NOI?
There is no good NOI on its own; it depends on the price. Divide NOI by the price to get the cap rate, and NOI by the loan payments to get the DSCR. Those ratios are what you compare.