NOI (Net Operating Income): What It Is and How to Calculate It

Net operating income is what a rental property earns in a year after the costs of running it, but before the mortgage. It is the number that describes the property itself, separate from how any particular buyer paid for it.

The formula

NOI = Gross annual rent - operating expenses

Operating expenses mean property tax, insurance, management, maintenance, a CapEx reserve and a vacancy allowance. They do not include your loan payment, and they do not include depreciation.

An example

A house rents for US$1,450 a month, so US$17,400 a year. Against that:

• Property tax: US$1,650
• Landlord insurance: US$1,100
• Management at 8%: US$1,392
• Maintenance at 5%: US$870
• CapEx reserve at 5%: US$870
• Vacancy at 5%: US$870

That is US$6,752 in operating expenses, so NOI is US$17,400 − US$6,752 = US$10,648.

Why the mortgage is excluded

Two buyers can pay the same price for the same house and get completely different monthly results, purely because one put 25% down and the other 20%. NOI strips that out so you can compare properties rather than compare loans. Once you divide NOI by the price you have the cap rate; once you subtract the loan payment you are back to cash flow.

What it leaves out

• Your loan. By design, but it means a property with healthy NOI can still be cash-flow negative at a high enough rate.
• Capital improvements. A roof replacement is not an operating expense, so NOI looks the same the year you spend US$12,000 on one.
• Whatever the seller left out. Listing pro formas routinely omit management (on the assumption you self-manage) and understate vacancy. Rebuild NOI with your own numbers.

Related reading

The calculator works out NOI, cap rate and cash flow from a price and a rent. For what a good resulting cap rate looks like, see what is a good cap rate.