What Is NOI? Net Operating Income Explained
Every other metric in real estate is built on this one number — and it is the easiest one to compute wrong.
$15,004
NOI on the $240,000 example — everything the property earns before the bank.
The definition
Net operating income is the income a property produces from operations, after the costs of running it and before the cost of financing it.
NOI = Effective Gross Income − Operating Expenses
Effective gross income is gross scheduled rent plus other income, minus vacancy and credit loss.
The point of excluding financing is that NOI describes the property, not your deal on the property. Two buyers can put wildly different loans on the same building; they still buy the same NOI. That is exactly why appraisers, lenders and commercial brokers all speak in NOI — it is the only income figure that survives a change of owner.
What belongs in NOI — and what never does
| Line item | In NOI? | Why |
|---|---|---|
| Gross scheduled rent | Yes (income) | The starting point — market rent for every unit, occupied or not. |
| Other income (parking, laundry, pet rent, storage) | Yes (income) | Recurring operating income the property generates. |
| Vacancy and credit loss | Yes (deduction) | Rent you scheduled but never collect. Turns gross rent into effective gross income. |
| Property taxes | Yes (expense) | Recurring, unavoidable, tied to the asset. |
| Insurance | Yes (expense) | Same. |
| Property management | Yes (expense) | Even if you self-manage — see below. |
| Repairs and maintenance | Yes (expense) | Routine upkeep to keep the unit rentable. |
| Utilities you pay | Yes (expense) | Water, sewer, trash, common-area power. |
| HOA dues | Yes (expense) | Recurring cost of ownership. |
| CapEx reserve | Contested — see below | Not in appraisal NOI. Belongs in investor underwriting. |
| Mortgage principal and interest | No | That is debt service. Including it double-counts and breaks DSCR. |
| Depreciation | No | A tax entry, not a cash operating cost. |
| Capital improvements (new roof, new kitchen) | No | Capitalized, not expensed. The reserve stands in for them. |
| Your income tax | No | Depends on you, not the property. |
| Loan points, closing costs | No | Acquisition costs — they hit cash-on-cash, not NOI. |
A worked example
A single-family rental at $240,000, renting for $2,100 a month. This is the same property used throughout these guides, so the numbers stay comparable.
NOI calculation
- Gross scheduled rent ($2,100 × 12)
- $25,200
- Less vacancy @ 5%
- −$1,260
- Effective gross income
- $23,940
- Property taxes
- −$3,000
- Insurance
- −$1,400
- Property management @ 8%
- −$2,016
- Maintenance @ 5%
- −$1,260
- CapEx reserve @ 5%
- −$1,260
- Total operating expenses
- −$8,936
NOI = $15,004 per year
Note the convention used here and in the DealQuanta engine: percentage-based expenses and vacancy are taken on gross scheduled rent, not on collected rent. It is one fewer circular dependency and it matches how most lenders size these lines. Whichever convention you use, use it consistently — mixing them is a reliable way to be quietly 3–5% wrong.
Self-management is not free
The CapEx argument
Strict appraisal NOI excludes a reserve for capital expenditure — roofs, furnaces, kitchens. Appraisers do this because reserves are an owner policy, not a property fact, and because the income approach handles capital costs through the cap rate instead.
For an investor deciding whether to buy, that convention is dangerous. The roof will be replaced; excluding it means your NOI describes a property that never ages. Practical answer: keep a reserve line in your own underwriting, and be aware that the NOI a broker or appraiser quotes you probably has no reserve in it — which is part of why broker cap rates always look better than yours. If you run the components honestly, the reserve is usually much larger than the 5% plug above: how much to budget for CapEx.
What to do with NOI once you have it
NOI is an input, not an answer. Three things consume it:
- Cap rate = NOI ÷ purchase price. The property’s unlevered yield, and the number that lets you compare it to every other listing. What counts as a good cap rate →
- DSCR = NOI ÷ annual debt service. How much margin the deal has before it stops covering the loan. What counts as a good DSCR →
- Cash flow = NOI − debt service. The money that actually reaches your account.
In the example above: cap rate is $15,004 ÷ $240,000 = 6.25%. With a 25% down payment and a 6.75% 30-year loan ($14,009 a year in debt service), DSCR is 1.07 and annual cash flow is $995 — about $83 a month. Same NOI, three very different-looking verdicts, which is precisely why NOI alone tells you nothing.
Frequently asked questions
Does NOI include the mortgage payment?
No. NOI is calculated before debt service. If you subtract the mortgage from NOI you get cash flow, and if you divide NOI by the mortgage you get DSCR — both of which break if the payment is already buried inside your expense line.
Does NOI include CapEx?
Appraisal and broker NOI generally exclude a capital reserve. Investor underwriting generally includes one, because roofs and furnaces are real costs even though they are irregular. Know which convention the number in front of you uses before comparing it to anything.
Does NOI include depreciation?
No. Depreciation is a tax deduction, not a cash cost of operating the building. NOI is a cash-basis operating figure.
What is a good NOI?
There is no such thing in isolation — a $15,000 NOI is excellent on a $150,000 property and poor on a $500,000 one. Convert it to a cap rate before judging it.
What is the difference between NOI and cash flow?
Debt service. NOI is what the property earns; cash flow is what is left after the lender is paid. An all-cash purchase has cash flow equal to NOI.