What is Net Operating Income in real estate?

Net Operating Income (NOI) is the annual income a property generates after subtracting all operating expenses but before deducting mortgage payments, capital expenditures, and income taxes. It is the most fundamental profitability metric in real estate investing.

Does NOI include mortgage payments?

No. NOI is calculated before any debt service. Mortgage principal and interest payments are excluded because NOI is designed to measure a property's operating performance independent of how it is financed.

What is the difference between NOI and cash flow?

NOI is income minus operating expenses only. Cash flow goes further by subtracting mortgage payments (debt service) and capital expenditures from NOI. A property can have positive NOI but negative cash flow if the mortgage payments exceed the NOI.

How can I improve my property's NOI?

You can improve NOI by increasing income (raising rents to market rate, reducing vacancy, adding revenue streams like laundry or parking fees) or decreasing operating expenses (shopping insurance, contesting property taxes, performing preventive maintenance to reduce emergency repairs).

Is depreciation included in NOI?

No. Depreciation is a non-cash accounting deduction used for tax purposes. Since it does not represent an actual cash outflow, it is excluded from the NOI calculation. NOI only includes real operating cash expenses.

Net Operating Income (NOI) Explained for Rental Property Owners

What Is Net Operating Income?

Net Operating Income, abbreviated as NOI, is the total income a rental property generates minus all reasonable operating expenses. It is calculated before accounting for mortgage payments, capital expenditures, depreciation, or income taxes. NOI serves as the foundation for nearly every other financial metric in real estate: cap rate, DSCR, and property valuation all start with NOI. If you only learn one number about your rental property, make it this one. Whether you own a single-family rental or a 50-unit apartment building, NOI tells you how well the property performs on a purely operational basis.

The NOI Formula

The calculation is clean and direct:

NOI = Gross Rental Income + Other Income - Operating Expenses

Gross Rental Income is the total rent collected (or collectible) from all units over the year. Other Income includes ancillary revenue such as parking fees, laundry machines, pet rent, storage units, or late fees. Operating Expenses cover every cost required to run the property on a day-to-day basis.

Try it yourself:

NOI Calculator

Annual Gross Rental Income ($)

Annual Operating Expenses ($)

Exclude mortgage and depreciation

What Is Included in NOI

Operating expenses that factor into the NOI calculation include:

•Property taxes: Annual real estate taxes assessed by the local government. For a $300,000 property in Texas, this might be $5,400 to $7,500 per year.
•Insurance: Landlord hazard insurance, liability coverage, and flood insurance if applicable. Typical range: $1,200 to $3,600 per year for a residential rental.
•Property management fees: Whether you pay a manager or manage yourself, this is typically 8% to 10% of collected rent. Even self-managers should account for this cost.
•Maintenance and repairs: Routine upkeep like HVAC servicing, plumbing repairs, appliance fixes, and landscaping. Budget 5% to 10% of gross rent for ongoing maintenance.
•Vacancy and credit loss: A reserve for periods when units sit empty or tenants fail to pay. Most investors budget 5% to 8% of gross rent.
•Utilities paid by the owner: Water, sewer, trash, common area electricity, or any utilities not passed through to tenants.
•HOA fees: If the property is in a homeowners association, monthly or quarterly dues are an operating expense.

What Is Excluded from NOI

Several significant costs are intentionally left out of the NOI calculation:

•Mortgage payments: Both principal and interest are excluded. NOI measures the property itself, not your financing decisions.
•Capital expenditures: Major improvements like a new roof ($8,000 to $15,000), HVAC replacement ($5,000 to $10,000), or kitchen renovation are not operating expenses. They are capitalized and depreciated over time.
•Depreciation: This is a non-cash tax deduction, not a real expense. Residential rentals are depreciated over 27.5 years for tax purposes.
•Income taxes: Your personal or corporate income tax liability is separate from the property's operating performance.

Why NOI Matters: The Foundation of Every Metric

NOI is not just one metric; it is the input that drives several others:

•Cap rate: NOI / Property Value. An inaccurate NOI means an inaccurate cap rate. Learn more in our cap rate guide.
•DSCR: NOI / Annual Debt Service. Lenders use this ratio to determine if a property can cover its mortgage. See our DSCR guide.
•Property valuation: Commercial and multifamily properties are valued using the income approach: Value = NOI / Cap Rate. A $1,000 increase in annual NOI at a 6% cap rate adds $16,667 to the property's value.
•Cash flow: Cash flow starts with NOI, then subtracts debt service and capital reserves. Without accurate NOI, your cash flow projections will be wrong.

How to Improve Your Property's NOI

Improving NOI comes down to two levers: increase income or decrease expenses. Here are practical strategies for each:

Increase Income

•Raise rents to market rate. If comparable units nearby rent for $1,500 and you are charging $1,350, that is $1,800 per year in lost income.
•Reduce vacancy by improving tenant retention: respond to maintenance requests quickly, offer lease renewal incentives, and keep units in excellent condition.
•Add ancillary income streams. Pet rent ($25 to $50 per month), covered parking ($50 to $100 per month), or coin-operated laundry can add $600 to $1,200 per unit annually.
•Bill back utilities. Submetering water or charging a flat utility fee shifts costs to tenants and increases effective rent.

Decrease Expenses

•Shop insurance annually. Getting three quotes each year can save $200 to $800 without reducing coverage.
•Appeal property tax assessments. If comparable sales suggest your property is over-assessed, a successful appeal can save $500 to $2,000 per year.
•Invest in preventive maintenance. A $200 HVAC tune-up prevents a $5,000 emergency replacement. Regular inspections catch small problems before they become large bills.

NOI vs. Cash Flow vs. Net Income

These three terms are frequently confused. Here is how they differ:

NOI = Gross Income minus Operating Expenses. It tells you how the property performs before financing. Using our worked example below, the NOI is $25,200.

Cash Flow = NOI minus Debt Service minus Capital Reserves. It tells you the actual money left in your pocket each year. If annual mortgage payments are $15,600 and you set aside $2,400 for capital reserves, cash flow is $25,200 minus $15,600 minus $2,400 = $7,200 per year ($600/month).

Net Income (Taxable) = NOI minus Mortgage Interest minus Depreciation. This is what you report on your tax return. If mortgage interest is $12,000 and annual depreciation is $8,727, your taxable net income is $25,200 minus $12,000 minus $8,727 = $4,473. Note that taxable income can be much lower than cash flow thanks to depreciation, which is a non-cash deduction.

Worked Example: Calculating NOI Step by Step

Let us walk through a complete NOI calculation for a duplex in Charlotte, NC:

Income: Unit A rents for $1,400/month, Unit B rents for $1,250/month. Gross rental income: ($1,400 + $1,250) x 12 = $31,800. The property also earns $50/month per unit in pet rent, adding $1,200/year. Total gross income: $33,000.

Vacancy allowance: 5% of gross rental income = $1,590. Effective gross income: $33,000 minus $1,590 = $31,410.

Operating expenses: Property taxes $3,100, insurance $1,800, property management at 8% of collected rent $2,513, maintenance $2,000, water/sewer $1,200, landscaping $600, miscellaneous $400. Total operating expenses: $11,613.

NOI: $31,410 minus $11,613 = $19,797 per year ($1,650/month).

If the duplex was purchased for $310,000, the cap rate is $19,797 / $310,000 = 6.4%. Use our free NOI calculator to run these numbers for your own property.