How to Calculate Net Operating Income (NOI)
Net Operating Income is the key profitability metric for real estate investments. NOI tells you how much income a property generates from operations—before debt service and income taxes. It's the foundation for cap rate, loan underwriting, and property valuation.
The Formula
NOI = Effective Gross Income − Total Operating Expenses
Where:
- Effective Gross Income (EGI) = Potential Gross Income − Vacancy & Credit Losses
- Operating Expenses = all costs to run the property except mortgage payments
What's Included (and Excluded) in Operating Expenses
Included:
- Property taxes
- Insurance
- Property management fees
- Maintenance and repairs
- Utilities (if landlord-paid)
- Landscaping, snow removal, pest control
- Capital expense reserves
NOT included:
- Mortgage principal and interest
- Depreciation
- Income tax
- Capital improvements
Step-by-Step Example
| Item | Annual |
|---|---|
| Potential Gross Income (100% occupancy) | $72,000 |
| − Vacancy & credit loss (7%) | −$5,040 |
| Effective Gross Income | $66,960 |
| − Property taxes | −$6,200 |
| − Insurance | −$2,400 |
| − Management (10% of EGI) | −$6,696 |
| − Repairs and maintenance | −$4,800 |
| − Reserves | −$2,400 |
| Net Operating Income | $44,464 |
Using NOI to Value Property
Property Value = NOI / Cap Rate
At a 6% cap rate: $44,464 / 0.06 = $741,067
Use our NOI calculator to analyze any income property.