Net operating income (NOI): what counts and how to calculate it
NOI is the money a rental property earns in a year after paying its operating costs, but before the mortgage. Cap rate, DSCR and cash flow are all built on it.
Updated Oct 29, 2026
The formula
NOI = collected income − operating expenses
Collected income is what you actually receive: scheduled rent plus any other income (parking, laundry, pet fees, storage), minus an allowance for vacancy and unpaid rent. No property is occupied 100% of the time, so even a great one should carry a vacancy figure.
Operating expenses are the costs of keeping the property running and rented:
- Property tax and insurance
- HOA dues, and any utilities the owner pays (often water, sewer and trash)
- Repairs and routine maintenance
- Capital expenses: a reserve for big items like a roof, HVAC system or water heater
- Property management, whether you pay a manager or value your own time
- Leasing costs, landscaping, pest control and similar recurring costs
What NOI leaves out
- Mortgage payments (principal and interest). They depend on how you finance the property, not on how the property performs. Subtract them from NOI to get cash flow.
- Income taxes and depreciation. These depend on the owner's tax situation.
- One-time purchase costs such as closing costs and the initial rehab. Those are part of what you invest, not a yearly operating cost.
Capital expenses are a gray area. Appraisers and commercial lenders often include a reserve for replacements; some sellers leave it out to make NOI look bigger. Including a reserve gives you the more honest number, and it's what the YieldBadger calculators do.
A worked example
A single-family house rents for $1,850 a month. The tenant pays all utilities. You expect about three weeks of vacancy a year (6%), set aside 5% of rent each for maintenance and capital expenses, and plan to hire a manager at 9% of collected rent.
| Scheduled rent ($1,850 × 12) | $22,200 |
|---|---|
| Less vacancy (6%) | −$1,332 |
| Collected income | $20,868 |
| Property tax | −$2,900 |
| Insurance | −$1,500 |
| Maintenance (5% of rent) | −$1,110 |
| Capital expenses (5% of rent) | −$1,110 |
| Management (9% of collected) | −$1,878 |
| Operating expenses | −$8,498 |
| Net operating income | $12,370 |
That's about $1,031 a month before the mortgage. Operating expenses came to 41% of collected income here; the share varies with tax rates, insurance costs, the property's age and who pays utilities, so build it from line items rather than assuming a percentage.
From here, the other numbers follow. Divide NOI by the price to get the cap rate. Divide it by the yearly mortgage payments to get the debt service coverage ratio. Subtract the mortgage payments to get cash flow, then divide that by the cash you put in to get cash-on-cash return.
Common mistakes
- Taking the seller's NOI at face value. A seller who manages the property themselves and does their own repairs may show no management or maintenance cost. You'll pay for both eventually, in money or time.
- Using pro forma rents. Base NOI on rents the property can get today. Check them against local data such as the rent estimator and current listings.
- Forgetting the tax reassessment. The current owner's tax bill may reflect an old assessment or a homestead exemption. Estimate tax at your purchase price.
- No vacancy. Even a single month between tenants is 8% of a year's rent.
- Mixing in the mortgage. If a number labeled NOI already has loan payments taken out, it's cash flow, and the cap rate built on it will be wrong.
Frequently asked questions
- Is NOI the same as cash flow?
- No. NOI is income minus operating expenses. Cash flow is NOI minus the mortgage payment. A property can have healthy NOI and negative cash flow if the loan payment is large.
- Does NOI include property taxes?
- Yes. Property tax and insurance are operating expenses and are subtracted to get NOI, even if your lender collects them through escrow along with the mortgage payment.
- Should capital expenses be included in NOI?
- Including a yearly reserve for replacements (roof, HVAC, appliances) gives a more realistic NOI, and many appraisers and lenders do. Sellers often leave it out, so check before comparing numbers.
- Is NOI calculated monthly or yearly?
- Usually yearly, since cap rates and lender ratios use annual figures. Dividing by 12 gives a monthly figure that's handy for comparing with a mortgage payment.
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For education only. Not financial, tax or legal advice; talk to a qualified professional about your situation.