What Is NOI and How Do You Calculate It on a Rental?

What is NOI and how do you calculate it?

NOI (net operating income) is the annual income a property generates after operating expenses but before mortgage payments, income taxes, depreciation, and capital expenditures. You calculate it with one line:

NOI = Effective Gross Income − Operating Expenses

That's the whole formula. The skill isn't the arithmetic — it's knowing which dollars belong in "income," which belong in "operating expenses," and which you must deliberately leave out. Get those categories wrong and every metric built on NOI (cap rate, debt coverage, valuation) inherits the error.

This guide walks through the calculation on a real small-multifamily example, then covers the traps that quietly inflate NOI on nearly every listing you'll see.

The two halves of NOI

1. Effective Gross Income (EGI)

Start with Gross Potential Rent — what the property earns at full occupancy — then add other income and subtract losses:

• Gross Potential Rent: all units rented at market
• Plus other income: laundry, parking, storage, pet rent, late fees
• Minus vacancy and credit loss: the rent you won't collect because units sit empty or tenants don't pay

A common rookie mistake is running NOI at 100% occupancy. Real properties turn over. Use a realistic vacancy factor for the submarket — often in the 5%–8% range for stable areas, higher in soft or high-turnover markets. Never assume zero.

2. Operating Expenses

These are the recurring costs of running the property. The usual line items:

• Property taxes
• Insurance
• Property management (budget it even if you self-manage — your time has a cost, and a future buyer will pay it)
• Repairs and maintenance
• Utilities the owner pays (water/sewer, trash, common-area electric)
• Landscaping, snow removal, pest control
• HOA dues, if any
• Reserves for turnover and small recurring fixes

What NEVER goes into NOI

This is where most people go wrong. NOI measures the property's performance independent of how you financed or structured it. Exclude:

• Mortgage principal and interest — that's debt service, not an operating expense. NOI is deliberately financing-neutral so two buyers with different loans can compare the same asset.
• Income taxes — those depend on your personal situation.
• Depreciation — a paper deduction, not a cash outflow. (If you want the real mechanics, see how residential rental depreciation works.)
• Capital expenditures — a new roof or HVAC replacement is a capital item, not an operating cost, though smart investors still set aside CapEx reserves separately.

Keep those out and NOI stays a clean, comparable measure of the asset itself.

A worked example: a small fourplex

Assume a fourplex with four units renting at $1,200/month.

Income

• Gross Potential Rent: 4 × $1,200 × 12 = $57,600
• Other income (laundry + parking): $1,800
• Gross potential: $59,400
• Vacancy and credit loss at 7%: −$4,158
• Effective Gross Income: $55,242

Operating Expenses

• Property taxes: $6,500
• Insurance: $2,200
• Property management at 8% of EGI: $4,419
• Repairs and maintenance: $3,600
• Owner-paid utilities: $2,400
• Landscaping and pest: $1,200
• Reserves: $1,800
• Total Operating Expenses: $22,119

NOI = $55,242 − $22,119 = $33,123

That $33,123 is what feeds every downstream metric. Divide it by the purchase price and you get the cap rate; if this fourplex is priced at $460,000, the cap rate is about 7.2%. Subtract annual debt service and you get cash flow before taxes.

Why NOI matters so much

NOI is the load-bearing number in income-property analysis:

• Valuation. Commercial and multifamily values are set by NOI ÷ market cap rate. Raise NOI by $5,000 in a 7% market and you've added roughly $71,000 in value. This is why operational improvements — bumping rents to market, adding pet rent, trimming a bloated management contract — compound into equity.
• Cap rate. NOI is the numerator. Learn the mechanics in how to calculate cap rate on a rental property.
• Lender sizing. Lenders divide NOI by annual debt service to get your DSCR. Most want 1.20–1.25x or better — see what lenders want on debt service coverage.

Notice cap rate and DSCR both start with NOI but answer different questions — a distinction worth understanding via cap rate vs cash-on-cash return.

The mistakes that inflate NOI on a listing

Brokers present NOI to make deals look their best. Pressure-test every one of these before you trust the number:

• Zero or token vacancy. A pro-forma at 2% vacancy in a 9% market is fiction. Re-run it at realistic levels.
• No management fee. "Owner-managed" hides a real cost. Add 8%–10% so your NOI reflects a scalable, sellable operation.
• Missing reserves and understated maintenance. Older buildings cost more. A $500/year repair budget on a 1970s fourplex is a red flag.
• Stale property taxes. Taxes often reset to the new sale price at purchase. Underwrite the reassessed number, not the seller's grandfathered bill — this alone can swing NOI by thousands.
• One-time or non-recurring income counted as ongoing. A one-off insurance reimbursement is not annual rent.

Any one of these can overstate NOI by 15%–25%, which at a 7% cap rate distorts value by tens of thousands of dollars.

Where clean data changes the game

The hard part of NOI isn't the formula — it's sourcing accurate, current inputs for taxes, insurance, market rent, and realistic vacancy for that specific submarket. Guess those and you get garbage-in, garbage-out. This is exactly where analyzing a deal with real, verified data pays off: instead of retyping a broker's optimistic pro-forma, tools like PropertyWiz AI pull live market figures and pre-populate those inputs so the NOI you're working from reflects the market, not the listing agent's spin.

Build the habit of rebuilding NOI from the ground up on every deal. It's the single most reliable way to spot an overpriced property before your money is in escrow.