Net Operating Income (NOI) is the annual income a real estate investment generates after deducting all operating expenses, but before accounting for income taxes and debt service (mortgage payments). It is the foundation of most income property valuation methods.
NOI Formula
NOI = Gross Rental Income − Vacancy & Credit Loss − Operating Expenses
Operating expenses include: property taxes, insurance, property management fees, maintenance and repairs, HOA fees, and any utilities paid by the landlord. They do not include mortgage principal or interest, depreciation, or income taxes.
Why Mortgage Is Excluded
NOI measures the property's income performance independently of how it is financed. Two investors buying the same building — one all-cash, one with 80% debt — would have the same NOI but very different cash flows after debt service. Keeping financing out of NOI allows investors to compare properties fairly regardless of capital structure.
NOI and Cap Rate
Cap Rate = NOI / Property Value. NOI is the numerator in the cap rate calculation. A higher NOI at the same price means a better cap rate. Increasing NOI (through rent increases or expense reduction) increases the property's value at any given cap rate — this is why experienced investors focus on operating efficiency as much as purchase price.
Common NOI Mistakes
The most common error is using stated rents instead of effective rents (after vacancy). A property with 10% vacancy generates only 90% of gross scheduled income. Always use effective gross income (gross rent minus vacancy allowance) as your starting point. Use the Cap Rate Calculator to model NOI with realistic vacancy assumptions.