How to Calculate NOI (Net Operating Income) for Your Rental Portfolio

NOI is the single number lenders, brokers, and investors use to evaluate a rental property. Done wrong, it makes a good deal look bad — or the reverse. Below: the formula, what belongs in (and what doesn't), and two worked examples.

Net Operating Income is the most-used metric in real estate finance and the most-misunderstood by self-managing landlords. Lenders use it to underwrite loans. Brokers use it to set asking prices. Investors use it to compare properties across markets. If you get it wrong — either by inflating it or depressing it — you make bad acquisition decisions, accept bad refinance terms, and hand misinformation to every partner who depends on your numbers.

NOI defined

Net Operating Income is the income a property generates from operations after paying operating expenses, but before debt service (mortgage payments) and capital expenditures.

The "before debt service" part is what trips people up. NOI is a property metric, not an investor metric. It measures how well the asset performs regardless of how you financed it. Two properties with identical operations but different mortgage amounts have the same NOI. That's intentional — NOI isolates the property's performance from your financing decisions.

The "before capital expenditures" part is equally important. CapEx — a new roof, a replaced HVAC system, a building-wide plumbing reline — is not an operating expense. Mixing them into your operating expense total understates NOI in years when you replace capital items, and overstates it in years when you don't.

NOI answers: What does this property earn from its operations?

NOI does not answer: What's left in my pocket after the mortgage? (That's cash flow.) What's the return on my equity? (That's cash-on-cash return.) What's it worth? (That requires the cap rate — more on that below.)

The formula

NOI = Gross Potential Rent − Vacancy and Credit Loss + Other Income − Operating Expenses

Or more cleanly:

NOI = Effective Gross Income (EGI) − Operating Expenses

Where:

• Gross Potential Rent (GPR): Total rent if every unit is leased at market rate 100% of the time
• Vacancy and Credit Loss: The allowance for units that aren't leased (vacancy) and rent that isn't collected (credit/bad debt)
• Other Income: Laundry, parking, pet rent, late fees, storage, vending
• Effective Gross Income (EGI): GPR minus vacancy/credit loss plus other income — the income the property actually collects
• Operating Expenses: The costs required to operate and maintain the property

What's in (and what's not)

Operating expenses that belong in NOI:

• Property taxes
• Property insurance (landlord/building policy)
• Property management fees (if you pay a PM) or an equivalent management expense allowance (if you self-manage — more on this below)
• Utilities paid by the landlord (water/sewer in multi-unit, common area electric, gas for common heat)
• Maintenance and repairs (routine — not CapEx)
• Landscaping, snow removal, cleaning
• Property administration (accounting, postage, software)
• Professional fees attributable to operations (legal for lease disputes, not acquisition)
• Advertising and leasing costs (if ongoing)

What does not belong in NOI:

The self-management question: If you manage your own property, there's a real cost to that — your time. When doing NOI analysis for acquisitions or refinances, most analysts include a management fee allowance of 8–10% of EGI even if the current owner self-manages. Why? Because the NOI needs to reflect the property's performance with professional management as a baseline. An NOI that only works because the owner works for free isn't a real operating number.

Worked example: single-family

Property: 3BR/2BA single-family home in Austin, TX. Rented at $2,400/month.

Step 1: Gross Potential Rent

$2,400/month × 12 months = $28,800/year

Step 2: Vacancy and Credit Loss

Market vacancy rate in this submarket: 5%. Use 5%.

$28,800 × 5% = $1,440 vacancy allowance

Step 3: Other Income

None. (No laundry, no separate parking fee, tenant pays all utilities.)

Effective Gross Income: $28,800 − $1,440 + $0 = $27,360

Step 4: Operating Expenses

NOI = EGI − Operating Expenses

$27,360 − $13,036 = $14,324

NOI = $14,324/year

This is the number a lender or broker uses to evaluate the property's income-producing capacity — regardless of whether the owner has a mortgage or owns it free and clear.

Worked example: 10-unit

Property: 10-unit apartment building. Mix of 6× 1BR at $1,100/month and 4× 2BR at $1,400/month.

Step 1: Gross Potential Rent

• 1BR: 6 × $1,100 × 12 = $79,200
• 2BR: 4 × $1,400 × 12 = $67,200
• GPR = $146,400/year

Step 2: Vacancy and Credit Loss

Submarket historical vacancy: 7%. Use 7%.

$146,400 × 7% = $10,248

Step 3: Other Income

• Coin laundry (2 washers, 2 dryers): $150/month × 12 = $1,800
• Covered parking (6 spaces at $50/month): $3,600/year
• Other income = $5,400

Effective Gross Income: $146,400 − $10,248 + $5,400 = $141,552

Step 4: Operating Expenses

NOI = EGI − Operating Expenses

$141,552 − $61,724 = $79,828

NOI = $79,828/year

Or roughly $6,652/month. At a purchase price of $1,000,000, this implies a 7.98% cap rate — which puts the building slightly above market for a well-maintained 10-unit in most secondary markets in 2026.

Cap rate context

Cap rate (capitalization rate) is how NOI converts to a property value — or how you use NOI to evaluate whether a listing price is reasonable.

Cap Rate = NOI ÷ Property Value

Or to solve for value:

Property Value = NOI ÷ Cap Rate

From the 10-unit example:

• If the market cap rate for this asset class and submarket is 6.5%, the implied value is $79,828 ÷ 0.065 = $1,228,123
• If the seller is asking $1,350,000, the implied cap rate is $79,828 ÷ $1,350,000 = 5.9% — you're paying for upside (rent growth, vacancy improvement) that isn't yet in the numbers

Cap rates are market-specific. A 5.5% cap rate is normal in New York or San Francisco; the same number in Wichita or Memphis is a thin deal. Before you apply a cap rate, verify what similar properties in the same submarket have sold for.

For how NOI connects to cash flow analysis and cash-on-cash return, see our rental property cash flow analysis framework, which adds debt service back into the picture.

Common mistakes (mixing capex with opex)

Mistake 1: Including mortgage payments in operating expenses

This is the most common error. If you're calculating NOI for a refinance or sale analysis, pull out the mortgage payments. NOI is pre-debt. Including debt service will make your NOI look lower than it is and make the property appear less valuable to lenders and buyers.

Mistake 2: Including CapEx in operating expenses

If you replaced the HVAC this year ($9,000), that's a capital expenditure — not a maintenance expense. Including it in your operating expenses this year understates NOI by $9,000. CapEx should be tracked separately and either amortized over the useful life (for accounting purposes) or noted separately in any NOI presentation.

For a proper CapEx vs operating expense framework, see CapEx vs repairs — what's deductible.

Mistake 3: Using scheduled rent instead of collected rent in EGI

NOI is about what the property actually generates. If you have a tenant who is three months behind, the uncollected rent is not EGI — it's receivable. Don't include it. Your vacancy and credit loss allowance should reflect reality, not a theoretical 0%.

Mistake 4: Forgetting the management fee if you self-manage

An NOI that excludes management fees because you handle it yourself will look better than any professionally managed alternative. That makes the analysis useless for comparison purposes. Include 8–10% for management even if you're doing it yourself.

Mistake 5: Using last year's actual expenses without normalization

If last year's expenses were low because you deferred maintenance, this year's NOI will look higher than it will sustain. A buyer or lender will normalize for deferred maintenance. Do it yourself first.

FAQ

What's a good NOI for a rental property? NOI in isolation isn't good or bad — it only becomes meaningful as a cap rate (NOI relative to value). For a purchase analysis, the right question is whether the cap rate implied by the asking price and your calculated NOI matches the market cap rate for similar properties.

Does NOI include depreciation? No. Depreciation is a non-cash accounting entry that doesn't affect the property's operating cash generation. NOI is a cash-basis metric.

How do I handle utilities that are sometimes landlord-paid? If landlord-paid utilities vary by unit (some tenant-paid, some landlord-paid), track them at the property level and include all landlord-paid utilities as an operating expense. Don't include utilities the tenant pays — they're not your expense.

Can NOI be negative? Yes. A property with high vacancy, below-market rents, and elevated operating expenses can produce negative NOI. This typically indicates either a distressed property or a gross overpayment at current rent levels.

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This isn't tax or financial advice. Consult a CPA or licensed real estate professional before making investment decisions.