What Is Net Operating Income (NOI)? How to Calculate It in Real Estate

By Markets & Investing DeskUpdated Nov 10, 2026

Definition

Net operating income (NOI) is a property's annual revenue minus its operating expenses, measured before mortgage payments, income taxes, depreciation and capital expenditures.

Key takeaways

Gross operating income is potential rent minus vacancy and credit loss, plus other income such as parking.
Property taxes, insurance, repairs, management fees and owner-paid utilities count as operating expenses.
The cap rate divides NOI by property value, so $56,000 on an $800,000 price gives a 7.0% cap rate.
Lenders divide NOI by annual debt service, and a DSCR of 1.25 means income covers loan payments 1.25 times.

Net operating income (NOI) is the annual income a real estate property generates after paying the costs of running it, but before mortgage payments, income taxes, depreciation and capital expenditures. It is the standard measure of what a property earns on its own, regardless of how the owner financed it or the owner’s tax situation, and it shows whether the building’s revenue covers its operating costs, and by how much.

How net operating income works

The NOI formula

NOI = Real estate revenue − Operating expenses

In a fuller form, revenue is built up in steps:

Potential gross income: rent the property would collect if every unit were leased at full rent.
Minus vacancy and credit loss: empty units and rent that tenants fail to pay.
Plus other income: parking, storage, laundry machines, vending, pet or late fees.
The result is gross operating income (often called effective gross income).
Minus operating expenses gives NOI.

NOI is normally stated as an annual figure, although it can be calculated monthly or quarterly when comparing periods.

What counts as an operating expense

Operating expenses are the recurring costs needed to keep the property running and leased:

Property taxes
Property insurance
Repairs and routine maintenance
Property management fees
Utilities paid by the owner
Janitorial, landscaping and trash services
Common-area costs and administrative expenses

What stays out of NOI

Mortgage principal and interest. Financing is excluded so the property can be judged independently of the loan.
Income taxes. These depend on the owner, not the building.
Depreciation and amortization. These are non-cash accounting charges.
Capital expenditures. Large, long-lived improvements, such as replacing a building’s entire air conditioning system or roof, are not operating costs, even though they consume cash.

Example of net operating income

Hypothetical example for illustration only. A small apartment building has the following annual figures:

Line item	Amount
Potential rental income	$96,000
Vacancy and credit loss (5%)	−$4,800
Parking and laundry income	$3,600
Gross operating income	$94,800
Property taxes	$12,000
Management fees	$7,600
Repairs and maintenance	$7,000
Utilities	$5,200
Insurance	$4,500
Janitorial and landscaping	$2,500
Total operating expenses	$38,800
Net operating income	$56,000

If expenses had exceeded $94,800, the result would be negative, a net operating loss.

How NOI is used

Capitalization rate

The cap rate divides NOI by the property’s price or value:

Cap rate = NOI ÷ Property value

Using the example, a purchase price of $800,000 gives $56,000 ÷ $800,000 = 7.0%. Because the cap rate treats the property as if it were bought for cash, it lets investors compare buildings of different sizes and prices on a common basis. Working backward, value can be estimated as NOI ÷ a market’s typical cap rate, so a change in NOI moves a property’s estimated value and year-over-year NOI growth is closely watched.

Debt service coverage ratio

Lenders compare NOI with the annual loan payments:

DSCR = NOI ÷ Annual debt service

If the example property carried a loan costing $44,800 a year, DSCR would be $56,000 ÷ $44,800 = 1.25, meaning income covers the payments 1.25 times. Commercial lenders use NOI to forecast cash flow and size the loan, and a property showing a net operating loss can lead to a rejected application.

Other ratios

NOI also appears in the net income multiplier (price ÷ NOI), cash-on-cash return and total return calculations. Subtracting debt service from NOI ($56,000 − $44,800 = $11,200 in the example) gives cash flow before taxes, still before any capital spending.

NOI vs. gross operating income: gross operating income is revenue after vacancy and credit loss but before expenses. NOI is gross operating income minus operating expenses.
NOI vs. cash flow: NOI ignores the mortgage and capital expenditures, so two identical buildings have the same NOI even if one is heavily leveraged and the other has no debt, though their cash flow to the owner can differ sharply.
NOI vs. net income: net income on an income statement subtracts interest, depreciation and taxes. NOI stops before those items.
NOI vs. EBIT: outside real estate, the closest equivalent is earnings before interest and taxes. The two are similar but not identical, since EBIT is reduced by depreciation and amortization while NOI is not.

Limitations of net operating income

It is not cash in the owner’s pocket. A property with strong NOI can still lose money after debt payments, a major roof replacement or tenant turnover costs.
Timing can be managed. Owners can defer some expenses and accelerate others, so a single year’s NOI may misrepresent the property’s normal performance. Sellers’ figures in particular deserve comparison with several years of history.
Definitions vary. NOI is not a GAAP-defined measure, so reserves for replacements, leasing commissions and tenant improvement costs may sit above or below the NOI line depending on who prepared the statement. Comparing two properties requires the same treatment for both.
Non-cash arrangements need valuing. If an owner waives a tenant’s $12,000 annual rent in exchange for property management work, an accurate NOI accounts for both the revenue and the expense rather than simply dropping them.
Projected NOI is an estimate. Forecasts depend on assumed rents and vacancy rates that may not materialize.

FAQs

What is a good NOI?

There is no universal target, because NOI is a dollar amount rather than a percentage. It becomes meaningful when compared with something: the property's price (the cap rate), its debt payments (DSCR) or its own prior years. A higher NOI relative to price indicates more income per dollar invested, though higher cap rates can also reflect higher perceived risk.

The Bottom Line

NOI matters to real estate investors comparing properties and to lenders sizing commercial loans. It judges a building on its own earnings, separate from financing and the owner's taxes, and drives cap rate and DSCR math. Because NOI is not GAAP-defined and excludes debt and capital spending, buyers should check several years of history and apply the same definitions when comparing properties.