What is net operating income?
Net operating income (NOI) is what a rental property earns in a year after paying the costs of running it, but before the mortgage. It shows how the property itself performs, no matter how it’s financed.
| Included in NOI | Not included |
|---|---|
| Rent and other income (laundry, parking, fees) | Mortgage principal and interest |
| Vacancy and unpaid rent | Big one-time improvements (a new roof) |
| Taxes, insurance, utilities you pay | Depreciation |
| Repairs, maintenance, management | Your income taxes |
Why NOI matters
- It sets the value. Income property is usually valued as NOI divided by a market cap rate. Raise NOI by $1,000 a year at a 7% cap rate and the property is worth about $14,300 more.
- It sizes the loan. Commercial lenders divide NOI by the yearly loan payments (the DSCR) to decide how much they’ll lend.
- It compares properties fairly. Because it ignores financing, two buildings bought with different loans can be compared side by side.
Worked example
A fourplex with $60,000 a year of rent and $1,200 of laundry income:
- Gross income: $61,200; less 5% vacancy leaves $58,140
- Expenses: taxes $7,500, insurance $2,800, utilities $3,000, repairs $4,500, other $1,500 and 6% management ($3,488): $22,788
- NOI: $58,140 − $22,788 = $35,352 a year
Expenses take about 39% of collected income. At a 7% market cap rate the property is worth about $505,000.
Frequently asked questions
Does NOI include the mortgage?
No. Subtract the yearly mortgage payments from NOI to get cash flow before income taxes.
What’s a normal expense ratio?
It varies with the building. Newer properties where tenants pay utilities often run 30–40% of income; older buildings where the owner pays heat can run 50% or more.
Should I use the seller’s NOI?
Check it. Seller figures often leave out vacancy, management or repairs. Rebuild it from the real tax bill, an insurance quote and the actual leases.
How is NOI related to cap rate?
Cap rate is NOI divided by price. The cap rate calculator works it from the other direction, starting with the price.
Check the whole deal
ElmCheck’s free deal analyzer starts from the same income and expenses, adds your loan, and shows cash flow, DSCR, cash-on-cash return, IRR and a buy, maybe or pass verdict.