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Investing

Net Operating Income (NOI)

Also called NOI

In short

Net operating income (NOI) is a rental property's yearly income minus its operating expenses, before mortgage payments, depreciation and income taxes. It is the basis for cap rate.

Formula
Income − operating expenses
Excludes
Mortgage payments
Includes
Taxes, insurance, upkeep
Feeds into
Cap rate, lender DSCR

How to calculate NOI

NOI = gross rental income + other income - vacancy and credit loss - operating expenses.

Operating expenses include property taxes, insurance, repairs and maintenance, property management, utilities the owner pays, HOA dues and reserves. Mortgage principal and interest, depreciation, income taxes and major capital improvements are left out.

Why NOI matters

NOI is the core measure of what a property earns. Divide it by price to get the cap rate. Lenders compare it with loan payments (debt service coverage) to decide how much they'll lend on an income property. Subtract debt payments to get cash flow for cash-on-cash return.

Checking a seller's NOI

Seller figures often leave out vacancy, management or reserves, or use rents that haven't been achieved. Rebuild NOI from leases, tax bills and insurance quotes. Property taxes may rise after a sale if the county reassesses at the new price.

The formula

NOI = Effective gross income − Operating expenses
Effective gross income
Scheduled rent and other income, minus vacancy and credit losses
Operating expenses
Taxes, insurance, maintenance, management and owner-paid utilities; not debt service or depreciation
Try it in the Rental Property ROI Calculator →
Example

NOI on a fourplex

Four units rent for $1,100 each: $52,800 a year. Laundry adds $1,200. Vacancy at 5% is $2,700. Operating expenses are taxes $6,000, insurance $2,400, maintenance $4,800, management $4,800 and water $2,100: $20,100. NOI = $52,800 + $1,200 - $2,700 - $20,100 = $31,200.

Net Operating Income (NOI) vs. Cash-on-Cash Return

Net Operating Income (NOI)

Net operating income (NOI) is a rental property's yearly income minus its operating expenses, before mortgage payments, depreciation and income taxes. It is the basis for cap rate.

Cash-on-Cash Return

Cash-on-cash return is a property's annual pre-tax cash flow divided by the total cash the investor put in. It measures the yield on your own money after financing.

The differenceNOI is income before mortgage payments; cash flow (the basis for cash-on-cash return) is NOI minus mortgage payments.

Frequently Asked Questions

Related terms

Capitalization Rate (Cap Rate)InvestingCapitalization rate (cap rate) is a rental property's net operating income divided by its value or price. It shows the property's unleveraged annual return and is used to compare income properties.BRRRR MethodInvestingThe BRRRR method is a rental investing strategy: buy a distressed property, rehab it, rent it, refinance based on the higher value, and repeat with the cash pulled out.After Repair Value (ARV)InvestingAfter repair value (ARV) is the estimated market value of a property once planned repairs and renovations are complete. Investors use it to decide how much to pay for a fixer-upper.PITIMortgages & financingPITI stands for principal, interest, taxes and insurance, the four parts of a typical monthly mortgage payment. Lenders use it to judge whether a borrower can afford a home.RefinanceMortgages & financingTo refinance is to replace an existing mortgage with a new one, usually to get a lower rate, change the loan term, or take cash out of the home's equity.Hard Money LoanMortgages & financingA hard money loan is a short-term loan from a private lender, secured mainly by the property's value rather than the borrower's income. Investors use it to buy and renovate properties quickly.Loan-to-Value Ratio (LTV)Mortgages & financingLoan-to-value ratio (LTV) compares the size of a mortgage with the property's value. A lower LTV means more equity and less risk for the lender, which often brings better loan terms.The 70% RuleInvestingThe 70% rule is a fix-and-flip guideline: pay no more than 70% of a property's after repair value (ARV) minus the cost of repairs. It leaves room for profit, holding and selling costs.

Learn more in the knowledge base

How to Finance a Foreclosure or Distressed PropertyGuide · 7 min readDistressed properties are harder to finance than move-in-ready homes. Condition, timing and the seller's terms all limit which loans will work. This guide matches financing options to each kind of distressed purchase and explains the trade-offs.How to Evaluate a Pre-Foreclosure DealGuide · 6 min readOnce an owner is interested in selling, you can replace rough screening estimates with real numbers. This guide walks through confirming what is owed, finding every lien, assessing condition and repairs, estimating value, and turning those figures into a maximum price you will not go above.Researching a Foreclosure Property Before the AuctionGuide · 6 min readAt a foreclosure auction you usually buy as-is, unseen and without contingencies, so research done before the sale is your only protection. This guide covers how to confirm the sale details, check title and liens, estimate value and repairs from the outside and turn it all into a maximum bid.
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Disclaimer: The information on this page is for general educational purposes only and is not legal, financial, tax or investment advice. Laws, lending rules and market conditions vary by state and change over time, and any figures shown are estimates. Before you buy, sell, finance or bid on a property, consult a qualified attorney, financial advisor, lender or licensed real estate professional about your situation.