How to calculate NOI (net operating income) on a rental property — 2026 guide

The NOI formula

NOI = Effective gross income − Operating expenses

Two moving parts, and the whole game is in defining each one honestly. Effective gross income is what the building actually collects in a normal year — not the rosy “every unit, every month, forever” number. Operating expenses are everything it costs to keep the lights on and the building standing, with one giant, deliberate exclusion: the mortgage. NOI stops before debt service. That single rule is what makes NOI useful — it describes the property, not your particular loan.

Because NOI ignores financing, a cash buyer and a buyer borrowing 75% compute the exact same NOI on the same building. That is the point. Their cash-on-cash returns and DSCRs will differ wildly, but the asset's earning power is one number, and that number is NOI.

Step 1: Build effective gross income

Most people start NOI from gross rent. That is already a mistake, because gross potential rent assumes 100% occupancy and 100% collection — neither of which happens. Effective gross income (EGI) is the realistic top line:

Gross potential rent. Every unit's monthly market rent × 12. Use the in-place lease rent if it is occupied and at market; use comparable rents if it is vacant or under-rented.
Minus vacancy and credit loss. Even a great property turns over. A reasonable default is 5–8% of gross rents — and you should derive vacancy from turnover math rather than guessing 5%. Credit loss (a tenant who stops paying before you evict) lives in the same line.
Plus other income. Coin laundry, pet rent, parking, storage, application and late fees. Individually small, but on a multi-unit it adds up and it is real, recurring income.

EGI is gross potential rent, minus the rent you will not collect, plus the non-rent dollars you will. It is the honest number every operating expense gets measured against.

Step 2: Subtract every operating expense

An operating expense is any recurring cost of running the property. The list is longer than most pro formas admit, and the omitted lines are exactly the ones that make a deal look better than it is:

Property taxes. Use the figure you will actually pay — many jurisdictions reassess to the sale price, so the seller's current bill can understate yours badly.
Insurance. A landlord (dwelling) policy, not a homeowner's policy. Premiums have jumped in much of the country; get a real quote, do not copy the seller's.
Property management. Typically 8–10% of collected rent. Budget it even if you self-manage — your time is not free, and you will eventually want to hand the property off.
Maintenance and repairs. Turn-make-ready, the leaky valve, the failed appliance. A common default is 5–10% of rent, or a per-door dollar figure scaled to the building's age.
Owner-paid utilities. Water, sewer, and trash are frequently the landlord's on small multifamily; common-area electric and gas too. Submetered or tenant-paid? Then it is zero — but confirm, do not assume.
HOA / condo dues, lawn, snow, pest control, licensing, bookkeeping. The miscellaneous tail that individually looks trivial and collectively is not.

The one genuinely debated line is the CapEx reserve — money set aside for the roof, HVAC, water heater, and kitchen that wear out on a multi-year clock. We will treat it two ways in the example below, because how you classify it changes the cap rate you quote (though not the cash that leaves your account).

What is NOT in NOI

Four things people wrongly subtract. Memorize the exclusions and you will out-underwrite half the listings you read:

The mortgage (principal & interest). Debt service is financing, not operations. It comes out after NOI to get cash flow.
Depreciation. A non-cash tax deduction. It belongs on your Schedule E, not in NOI.
Income tax. NOI is pre-tax by definition. Your personal tax situation does not change the building's NOI.
One-time capital projects. Replacing the roof this year is a capital event, not an annual operating cost. (The recurring reserve for that roof is the gray area; the lump-sum replacement is clearly below the line.)

Worked example: a $250K duplex

Two units at $1,250/month each, $250,000 purchase price. Let's build NOI from the top down.

Effective gross income

Gross potential rent: $2,500 × 12 = $30,000
Vacancy & credit loss (6%): −$1,800
Other income (laundry): +$300
Effective gross income: $28,500

Operating expenses

Property taxes: −$3,600
Insurance: −$1,500
Management (8% of collected rent): −$2,250
Maintenance & repairs: −$1,800
CapEx reserve: −$2,500
Owner-paid water / sewer / trash: −$1,500
Lawn / snow / pest: −$600
Licensing / bookkeeping: −$450
Total operating expenses: $14,200

NOI = $28,500 − $14,200 = $14,300

That $14,300 is the building's pre-financing earning power. Note the operating expense ratio: $14,200 ÷ $28,500 = 50%. That is right in the normal band for a small, owner-paid-utility multifamily — which is the quick sanity check that tells you no big line item got skipped. The old 50% rule is exactly this expense-ratio heuristic in disguise.

The CapEx classification trap

Watch what happens to the same building under the two conventions:

Owner / conservative view: fund the $2,500 CapEx reserve inside NOI. NOI = $14,300, cap rate = $14,300 ÷ $250,000 = 5.7%.
Appraiser / lender view: CapEx is a below-NOI capital item. NOI = $16,800, cap rate = 6.7%.

Same property, two cap rates a full point apart — and the entire difference is one $2,500 line and where you file it. Neither is “wrong.” What is wrong is comparing a broker's 6.7% (reserves excluded) against your own 5.7% (reserves included) and concluding the broker's deal is better. When you read a cap rate, always ask which NOI it sits on. Crucially, the actual cash you must set aside for that roof is $2,500 either way — the classification is a labeling choice, not a cash choice.

NOI drives cap rate, DSCR, and value

NOI is not an end in itself; it is the input to the three numbers that actually decide deals.

Cap rate = NOI ÷ price

We just did it: $14,300 ÷ $250,000 = 5.7%. That is the unleveraged yield, and it is how you compare two buildings on equal footing. The full method — and the tricks brokers use to inflate it — is in how to calculate cap rate.

DSCR = NOI ÷ debt service

Finance the duplex with 25% down ($62,500) at 7% on a 30-year loan and the principal-and-interest payment is about $1,247/month, or $14,970/year. Honest DSCR = $14,300 ÷ $14,970 = 0.96 — under 1.0, meaning the building does not quite cover its own mortgage once you fund real reserves. Yet a DSCR lender who computes coverage as gross rent ÷ PITIA gets $2,500 ÷ $1,672 = 1.50and happily approves it. The gap between 0.96 and 1.50 is vacancy, management, and reserves — the exact lines the lender's shortcut ignores. Both numbers are “DSCR;” only one reflects how the property will actually live.

Value = NOI ÷ market cap rate (5+ units)

For commercial-scale property, NOI literally is the valuation. At a 6.5% market cap, value = NOI ÷ 0.065, so every $1 of recurring NOI is worth about $15.40 of price. Raise rents $100/month on both units — $2,400/year, of which roughly $2,200 survives to NOI after a little extra management — and value climbs $2,200 ÷ 0.065 ≈ $34,000. That multiplier is why operators obsess over small, durable NOI gains: on commercial property they are not worth their face value, they are worth ~15× their face value. (One-to-four-unit homes are still priced by sales comps, so this lever is weaker there — but NOI still tells you whether the comp price cash-flows.)

NOI vs cash flow: the last step

NOI is the building; cash flow is your seat in it. Subtract debt service from NOI:

Cash flow = $14,300 − $14,970 = −$670 / year

So this “5.7% cap” duplex is mildly cash-flow negative at 25% down and 7% — not because the building is bad, but because the interest rate sits above the cap rate, so leverage works against you. This is the difference between analyzing a property (NOI, cap rate) and analyzing an investment (cash flow, cash-on-cash, DSCR). You need both. A building with strong NOI and a punishing loan can still bleed cash; a thinner-NOI building bought right can print it. NOI tells you whether the asset earns; the financing tells you whether you do.

Three ways people get NOI wrong

Starting from gross rent, not EGI. Skipping vacancy and collection loss inflates NOI before the first expense is even subtracted.
Omitting the boring lines. Management (especially when self-managing), reserves, and owner-paid utilities are the usual casualties. A pro forma showing a 25–30% expense ratio on a small rental is almost always missing something — the honest band is 35–50% of EGI.
Sneaking the mortgage in. The most common beginner error. The moment debt service is inside “NOI,” you have computed something else — and your cap rate and any value derived from it are garbage.

Open the NOI calculator

FAQ

What is the NOI formula in one line?

NOI = effective gross income − operating expenses. Effective gross income is gross potential rent minus vacancy and credit loss, plus any other income (laundry, pet rent, storage). Operating expenses are everything it costs to run the building — taxes, insurance, management, maintenance, reserves, owner-paid utilities — but NOT the mortgage, depreciation, or income tax. NOI is a pre-financing, pre-tax number.

Does NOI include the mortgage payment?

No. The mortgage (principal and interest) is debt service, not an operating expense. NOI is deliberately financing-blind so that two buyers looking at the same building — one paying cash, one borrowing 75% — compute the same NOI. Subtract debt service from NOI and you get pre-tax cash flow, which is a different number. If a broker's NOI looks suspiciously high, check whether they also quietly left out vacancy, management, and reserves.

Does NOI include capital expenditures (CapEx) and maintenance reserves?

Maintenance is always an operating expense. CapEx is the gray area. Purists and conservative underwriters fund a CapEx reserve inside NOI; appraisers and most commercial lenders treat CapEx as a below-the-line capital item and leave it out of NOI. Both are defensible — just be consistent and know which convention a quoted cap rate assumes. The cash leaving your account is identical either way; only the label and the cap rate change.

What is the difference between NOI and cash flow?

NOI is the building's income before financing. Cash flow is what is left after the mortgage: cash flow = NOI − annual debt service (and minus any one-time capital projects). A property can have a healthy positive NOI and still be cash-flow negative if it is highly leveraged or the interest rate is above the cap rate. NOI measures the asset; cash flow measures your position in it.

What is a good NOI?

NOI is an absolute dollar figure, not a ratio, so there is no universal 'good' number — a $14,000 NOI is excellent on a $180,000 house and thin on a $400,000 one. Judge it by dividing into price (that is the cap rate) and by the operating expense ratio: well-run small rentals typically run 35–50% of effective gross income in operating expenses, so an NOI that implies a 15% expense ratio is almost certainly missing line items.

How does NOI set the value of a small apartment building?

For 5+ unit and commercial property, value = NOI ÷ market cap rate. At a 6.5% market cap, every $1 of recurring annual NOI is worth about $15.40 of value, so a $2,400/year rent increase that drops ~$2,200 to NOI can add roughly $34,000 in value. (One-to-four-unit homes are still valued mostly by sales comps, not NOI — but NOI is what tells you whether the comp price actually cash-flows.)