What is net operating income (NOI)?

Net operating income (NOI) is a rental property's income minus its operating expenses, before any mortgage payment, depreciation or income tax. The formula is NOI = effective gross income minus operating expenses, where effective gross income is the rent and other income you expect to collect after vacancy.

NOI measures what the property itself earns, whoever owns it and however it is financed. It is the number underneath the cap rate, most valuations of income property, and every honest cash flow projection.

How do you calculate NOI?

1. Gross potential income. A full year of rent at market rates, plus any other income the property earns: pet rent, parking, storage, laundry, late fees. For a short-term rental, the nightly rate times the nights you expect to book.
2. Minus vacancy and credit loss. The months it sits empty and the rent you never collect. Long-term rental allowances commonly run 5% to 10%; the national rental vacancy rate was 7.6% in the third quarter of 2026, apartments included. A short-term rental's unbooked nights are already out of its income, so it needs no separate line.
3. That leaves effective gross income.
4. Minus operating expenses: every recurring cost of running the property, listed below.
5. The result is NOI.

What is included in NOI?

Taxes, insurance and dues are the lines people most often get wrong, because a lender bundles them with the loan payment as PITIA. In NOI they are operating costs: the property pays them whether or not it has a mortgage.

Does a capex reserve belong in NOI?

It depends on whose convention you follow. In commercial real estate, NOI usually excludes replacement reserves, and analysts subtract them on the next line to get net cash flow. Most single-family investors put a capex reserve inside NOI, because a $12,000 roof is a real cost of owning a house, just one that arrives in lumps. Either is defensible. What matters is consistency: a listing's NOI with no reserve and your own with one will not compare. On your tax return, capital improvements are depreciated rather than deducted, which is a separate question from how you budget for them.

Trailing, current and projected NOI

When you look at a property someone else owns, ask which NOI you are being shown.

• Trailing NOI (often "T12") is the last twelve months of actual income and expenses. It is the most reliable, if the records are complete and the costs a new owner will face, such as a reassessed tax bill, are added.
• Current, or in-place, NOI annualizes today's leases and costs. It is fair for a stable rental with tenants in place.
• Projected, or pro forma, NOI is what the seller or agent expects the property could earn, usually at higher rent and lower costs. Treat it as a sales argument and rebuild it from your own figures.

NOI vs cash flow vs net income

The three numbers start in the same place and answer different questions.

• NOI asks what the property earns: $20,664.
• Cash flow asks what reaches your account after the loan: a loss of $4,507.68. That is the figure behind the cash-on-cash return.
• Net income on a tax return asks what is taxable. Roughly, it starts from NOI, adds back the $1,800 capex reserve (a budget, not a deduction, until you replace something), then subtracts the first year's $22,406.24 of mortgage interest and depreciation. If the building is worth $320,000 of the price and the land $80,000, a full year's straight-line depreciation over 27.5 years is $11,636.36. The result is a paper loss of about $11,578.60, even though NOI is positive.

That last line is general education, not tax advice: the first year's depreciation is prorated by month, and whether you can use a rental loss depends on your income and how active you are. Rental property depreciation explains the rules; confirm your own situation with a CPA.

NOI vs EBITDA

EBITDA (earnings before interest, taxes, depreciation and amortization) is the company-level cousin of NOI. Both ignore financing and depreciation. The difference is scope: NOI belongs to one property and excludes the owner's overhead, while EBITDA belongs to a business and includes its salaries, office and other corporate costs. For one rental held in an LLC, EBITDA is roughly NOI minus the entity's own costs.

What NOI is used for

• The cap rate. NOI divided by price. The sample house's long-term NOI of $20,664 on $400,000 is a 5.17% cap rate.
• Value. NOI divided by a market cap rate. At 5.5%, every extra $1,000 of NOI adds $18,181.82 of value, which is why raising NOI is the main way to add value to an apartment building.
• Loans on larger properties. Commercial lenders divide NOI by the year's loan payments. On the sample house that is $20,664 ÷ $25,171.68 = 0.82, a fail, even though the residential method passes it at 1.11 by dividing gross rent by PITIA. Loans on one to four units almost always use the residential method; how to calculate DSCR sets out both.

How to raise NOI

• Income: bring rent to market at each renewal, keep good tenants (a turnover can cost a month of rent and a make-ready), add pet rent, parking or storage, and on a short-term rental, price nights to demand and add the amenities guests in your market pay for.
• Expenses: appeal an inflated tax assessment, reshop insurance every year, fix small problems before they become large ones, and make the owner-paid utilities efficient.
• Not on paper: cutting the vacancy allowance or the capex reserve raises NOI in a spreadsheet and nowhere else.

GoDoor's deal calculator builds NOI line by line from an address, with every assumption shown so you can replace it with your own.

Mistakes that distort NOI

• Subtracting the mortgage payment, which turns NOI into cash flow and breaks every ratio built on it.
• Trusting a seller's "pro forma" NOI, built on projected rent, no vacancy and last year's taxes.
• Leaving out management because you will manage it yourself. A buyer, a lender or your future self will have to pay for it.
• Using the current owner's property tax bill when the sale will reset the assessment.
• Counting taxes and insurance in NOI, then again inside the loan payment, when working out cash flow.

General education, not financial, tax or legal advice. Figures are examples: rates, rules and programs change, and every lender sets its own. Last checked November 4, 2026.