Net operating income (NOI) is the money a rental property earns from its operations after you pay the costs of running it. It is calculated before mortgage payments, capital improvements, depreciation and income taxes, which makes it a clean measure of how the property itself performs.
Investors, lenders and appraisers all lean on NOI. Because it ignores financing, two buyers with very different loans can look at the same building and agree on its operating results.
How to calculate it
Start with everything the property could collect, subtract what you lose, then subtract operating expenses.
NOI = (Gross potential rent + other income) minus vacancy and credit losses minus operating expenses
Operating expenses usually include property taxes, insurance, repairs and maintenance, utilities the owner pays, property management fees, landscaping, pest control and administrative costs. Leave out:
- Mortgage principal and interest
- Capital improvements, such as a new roof or HVAC system
- Depreciation and amortization
- Owner income taxes
Worked example
Take a hypothetical 8-unit building where each unit rents for $1,500 a month.
| Line item | Annual amount |
|---|---|
| Gross potential rent (8 x $1,500 x 12) | $144,000 |
| Laundry and parking income | $4,000 |
| Vacancy and credit loss (5% of rent) | minus $7,200 |
| Effective gross income | $140,800 |
| Operating expenses | minus $56,000 |
| Net operating income | $84,800 |
If a buyer expects a 6.5% cap rate in that market, the building would be valued at roughly $84,800 divided by 0.065, or about $1.3 million.
Why it matters for landlords
NOI drives property value. Since value is often estimated by dividing NOI by a market cap rate, every dollar you add to NOI can add many dollars to what the property is worth. Raising rents to market, cutting waste and reducing turnover all show up here.
Lenders also use NOI to calculate the debt service coverage ratio, which compares NOI to annual loan payments. A ratio comfortably above 1.0 tells them the property can carry its debt.
Clean books make NOI easy to trust. With TenantLoop accounting, income and expenses are categorized in a general ledger, so an NOI report is a few clicks away instead of a spreadsheet project. For tax treatment of any line item, check with a CPA.
Related terms
In practice. How the term shows up day to day.
Does NOI include mortgage payments?
No. NOI is measured before debt service, so principal and interest are left out. That keeps NOI focused on the property itself rather than on how a particular owner financed it.
Is depreciation subtracted when calculating NOI?
No. Depreciation is a non-cash tax deduction, so it does not belong in NOI. It shows up later on your tax return, not in the operating picture.
What is a good NOI?
There is no single target. A healthy NOI is one that covers your debt service with room to spare and supports the cap rate you expect for the property type and market.