Calculating Net Operating Income (NOI) for Investment Property

If you’ve ever stared at a rental listing that promises “great cash flow” the way a fast-food menu promises
“artisan,” congratulations: you’re ready for NOI.
Net Operating Income (NOI) is the real estate world’s lie detectorat least for the property’s day-to-day performance.
It helps you answer a simple question: How much money does this property generate from operations before financing
and taxes enter the chat?

In this guide, you’ll learn exactly how to calculate NOI step by step, what to include (and what to keep out),
how NOI connects to cap rates and valuation, and how to avoid the most common “spreadsheet facepalms.”
Then, at the end, you’ll get a set of real-world, experience-based lessons that investors repeatedly learn the hard way
so you can learn them the cheaper way.

What Is NOI (and Why Investors Obsess Over It)?

Net Operating Income (NOI) is the property’s income from core operations minus the recurring operating expenses
required to run it. Think of it as the property’s “engine profit”not influenced by your loan, your tax bracket,
or whether your accountant drinks espresso or cold brew.

Investors love NOI because it makes properties easier to compare. Different down payments and interest rates can make
cash flow look wildly different, but NOI focuses on the property’s operating strength.

What NOI is used for

• Valuation and cap rate: Cap rate is commonly calculated as NOI divided by property value.
• Underwriting and lender metrics: Lenders often look at NOI relative to debt service (e.g., DSCR).
• Benchmarking performance: Tracking NOI helps you spot rising expenses, weak rents, or management issues.
• Comparing deals across markets: A duplex in Ohio and a fourplex in Arizona can be compared more fairly using NOI.

The NOI Formula (Simple on Purpose)

The classic formula is:

NOI = Gross Operating Income − Operating Expenses

You’ll also see NOI calculated using a more realistic income number called Effective Gross Income (EGI):

NOI = Effective Gross Income − Operating Expenses

Why EGI? Because it bakes in vacancy and nonpayment. In real life, units sit empty sometimes, and occasionally tenants
decide rent is “optional.” (It isn’tbut good luck telling them that.)

Step-by-Step: How to Calculate NOI for an Investment Property

Step 1: Calculate Potential Gross Income (PGI)

Potential Gross Income is the income you’d collect if everything is rented and everyone pays on time.
It usually includes:

• Scheduled rent: Monthly rent per unit × 12
• Other recurring income: parking fees, laundry, storage, pet rent, application fees (if recurring), etc.

Example: A triplex with rents of $1,450, $1,450, and $1,600 has annual scheduled rent of:
(1,450 + 1,450 + 1,600) × 12 = $54,000.
If it also earns $100/month from laundry, that’s another $1,200/year.

PGI = $54,000 + $1,200 = $55,200

Step 2: Subtract Vacancy and Credit Loss to Get EGI

Vacancy and credit loss represent the reality that not every unit is always occupied and not every dollar is always collected.
The EGI relationship is commonly expressed as:

Effective Gross Income (EGI) = PGI − Vacancy and Credit Loss

Vacancy assumptions vary by market and asset type. A stabilized small multifamily might underwrite at 5% vacancy,
while a student rental could be seasonal and bumpier. If you have historical data (a trailing 12-month statement),
use it. If you don’t, use conservative market assumptions.

Example continued: If you underwrite 5% vacancy:

Vacancy = 0.05 × $55,200 = $2,760

EGI = $55,200 − $2,760 = $52,440

Step 3: List Operating Expenses (Only the “Keep It Running” Costs)

Operating expenses are the recurring costs required to operate and maintain the property. Common categories include:

• Property taxes
• Insurance
• Repairs and maintenance (routine fixes, turnover touch-ups, small plumbing/electrical)
• Property management (third-party fees, leasing fees, admin)
• Utilities paid by owner (water/sewer, trash, electric for common areas, gas)
• HOA dues (if applicable)
• Landscaping/snow removal (if owner-paid)
• Licenses/permits (where applicable)
• Advertising/marketing (especially for frequent turnover)

Pro tip: expenses are rarely “one number.” A cleaner method is to use categories and totals from actual statements where possible,
then sanity-check them as a percentage of EGI. If a small rental claims “only $900/year in maintenance,” it might be true
but it might also be the calm before the water heater storm.

Step 4: Exclude These Items (They’re Not NOI)

NOI intentionally excludes items that depend on how the deal is financed or your personal tax situation.
The most common exclusions are:

• Debt service: mortgage principal and interest payments
• Income taxes
• Depreciation and amortization (non-cash accounting items)
• Capital expenditures (CapEx): big-ticket replacements and improvements (e.g., new roof, HVAC replacement)

One nuance: some investors include a reserve for replacements (a planned savings amount for future CapEx)
when analyzing performance. Whether you treat reserves as an expense in your “NOI” depends on context,
but be consistentespecially when comparing properties.

Step 5: Compute NOI

Now subtract operating expenses from EGI:

NOI = EGI − Operating Expenses

Example continued: Let’s say annual operating expenses are:

NOI = $52,440 − $19,395 = $33,045

NOI vs. Cash Flow: Why Your Bank Account Might Disagree

NOI is not the same as cash flow. Your bank account cares about everything NOI ignores, including:
mortgage payments, CapEx, and (yes) taxes.

A property can have a strong NOI but weak cash flow if it’s heavily leveraged. Conversely, a property can have modest NOI
but decent cash flow if it’s financed very conservatively or owned free and clear.

A quick “real life” check

• NOI answers: “How profitable is the property’s operation?”
• Cash flow answers: “How much money do I keep after everything?”

How NOI Connects to Cap Rate and Property Value

Once you have NOI, you can estimate a cap rate (or value), which is one reason NOI shows up everywhere in commercial real estate.

Cap rate formula

Cap Rate = NOI ÷ Property Value

Example: If NOI is $33,045 and the property is priced at $525,000:

Cap Rate = 33,045 ÷ 525,000 = 0.0629 → 6.29%

You can also flip the relationship to estimate value based on an expected market cap rate:

Estimated Value = NOI ÷ Cap Rate

If similar properties trade at a 6.5% cap rate, a $33,045 NOI might imply:

Value = 33,045 ÷ 0.065 ≈ $508,385

This is exactly why increasing NOI (through higher rents or lower expenses) can increase valueespecially in income-based valuation.
It’s also why “just add a coin-op laundry” is a real estate cliché: small income bumps can meaningfully move NOI.

What Counts as an Operating Expense (and What Usually Doesn’t)

Common operating expenses

Most recurring costs that keep the property functioning and rentable are operating expenses:
taxes, insurance, management, repairs, utilities, and routine services.

Common items that are not operating expenses

• Mortgage payments (principal + interest)
• Major renovations and big replacements (roof, new HVAC, major plumbing overhaul)
• Depreciation (accounting, not a check you write)
• Income taxes
• Owner’s personal expenses that aren’t required to operate the property

Gray area alert: “Is this repair or CapEx?” If it extends the life of the asset substantially or is a major replacement,
it’s usually treated more like CapEx than routine maintenance. The practical approach is to be consistent and conservative:
treat big-ticket items as CapEx and don’t let them sneak into NOI just to make the deal look prettier.

NOI for Different Property Types: The Same Math, Different Drama

Single-family rentals (SFR)

SFRs are often simpler: rent in, expenses out. But they can be “lumpy” because a single vacancy hits harder
and big repairs aren’t spread across multiple units.

Multifamily

Multifamily NOI often includes more line items (payroll, common area utilities, turnover costs), but vacancy risk can be more stable
because one empty unit doesn’t turn income into a horror movie overnight.

Commercial and NNN leases

In triple-net (NNN) arrangements, tenants may reimburse taxes, insurance, and common area maintenance.
You might see reimbursements as income and the corresponding expenses on the other side. The key is to avoid double-counting
and to reflect the lease structure accurately.

Pro Forma NOI vs. Actual NOI: “Hope” Is Not a Strategy

Actual NOI is based on historical performance (often using trailing 12 months, or “T-12”).
Pro forma NOI is based on what you expect after improvements, rent increases, or stabilization.

Pro forma can be useful, but it should be earned with evidence:
market rent comps, realistic vacancy assumptions, and expenses that match how the property will actually operate.
If the seller’s pro forma assumes “0% vacancy” and “repairs: $0,” the spreadsheet isn’t underwritingit’s fan fiction.

Common NOI Mistakes (A Greatest Hits Album)

• Including the mortgage payment as an operating expense (NOI says: “Nice try.”)
• Ignoring vacancy because the property is “currently full” (so was the Titanic… briefly)
• Underestimating repairs and turnover costs, especially on older properties
• Forgetting management costs because you plan to self-manage (your time still has value)
• Mixing CapEx into operating expenses (or hiding it entirely)
• Using last year’s taxes without considering reassessment after purchase

A Practical NOI Checklist You Can Reuse

Income

• Scheduled rent (annual)
• Other recurring income (parking, laundry, storage, pet fees)
• Less: vacancy & credit loss
• = Effective Gross Income (EGI)

Operating expenses

• Property taxes
• Insurance
• Repairs & maintenance
• Property management & leasing
• Utilities (owner-paid)
• HOA, licenses, landscaping, snow, pest control
• = Total operating expenses

Calculation

NOI = EGI − Operating Expenses

Conclusion: Make NOI Your First Filter (Not Your Last Word)

Calculating NOI is one of the fastest ways to cut through hype and evaluate an investment property’s operational strength.
Start with income, adjust for vacancy and credit loss, subtract true operating expenses, and keep financing, taxes, and big
capital projects out of the NOI bucket. Then use NOI to compare deals, estimate cap rates, and stress-test your assumptions.

Most importantly: NOI is a tool, not a trophy. A great NOI on paper still needs reality checksmarket rents, property condition,
tenant quality, local taxes, and expense creep. If you treat NOI like a disciplined habit instead of a one-time calculation,
you’ll make smarter offers, avoid bad surprises, and keep your investment decisions grounded in numbers instead of vibes.

Field Notes: Experiences From the NOI Trenches (Extra )

Since you asked for experience-based insights, here are the patterns that show up again and again when people start
calculating NOI in the real world. These are not “textbook” lessonsthese are the “why is my spreadsheet crying?”
lessons.

1) The “Taxes Stayed the Same” Myth

A first-time investor often plugs in last year’s property taxes and calls it a day. Then the purchase closes,
the county reassesses, and the new tax bill arrives like an uninvited guest who also eats all your snacks.
The experience usually ends with: “So… NOI is lower than I thought.” Moral: underwrite taxes based on realistic
post-purchase assessments, not historical nostalgia.

2) Vacancy Isn’t PersonalIt’s Physics

Many new buyers feel oddly offended by vacancy assumptions. “But I’m a great landlord!” Sure, and gravity still works.
Tenants move. Life happens. Units turn. Even stable properties have downtime for make-ready, showings, and lease-up.
The most helpful mindset shift is treating vacancy as a normal operating cost of doing business, not a failure of character.

3) Repairs: The Small Numbers That Become Big Numbers

In spreadsheets, “repairs” looks like a neat line item. In reality, it’s a parade:
leaky faucets, garbage disposals, broken blinds, HVAC service calls, a mysterious stain that “was already there,”
and one tenant who thinks flushable wipes are a lifestyle.
Investors who keep NOI healthy tend to budget repairs realistically and track them monthlybecause “it was only $150”
happens 40 times a year.

4) Self-Management: Your Time Is Not Free (Even If You’re Stubborn)

A common early-stage experience is calculating NOI with $0 for management because “I’ll do it myself.”
Then it’s 9:47 p.m., a tenant is texting about a toilet, and you’re googling “how to replace flapper valve”
like you’re studying for a plumbing final.
Even if you self-manage, consider underwriting a management fee anyway. It keeps your NOI comparable to other deals
and helps you see whether the property is truly strongor just being propped up by your unpaid labor.

5) The CapEx Sneak Attack

This is the classic: the property’s NOI looks solid, but a roof is near end-of-life, the water heaters are ancient,
and the parking lot is auditioning for the role of “crater field.”
Because CapEx isn’t in NOI, people sometimes forget it exists. Experienced investors don’t forget
they keep a reserve plan. Even if you don’t subtract reserves in NOI, you should still plan them in your overall analysis
so you don’t confuse “operating profit” with “money I can safely spend.”

6) Income Upside Is Often Boring (Which Is Why It Works)

The most reliable NOI improvements are rarely dramatic. They’re boring:
tighten utility billing, add paid parking, renegotiate landscaping, reduce water usage, raise rents to market in stages,
improve tenant screening to reduce turnover, and fix recurring maintenance issues instead of paying the “same repair tax”
every month. Over time, these unglamorous moves can lift NOI meaningfullyand that’s where value creation tends to live.

7) The Best NOI Habit: Update It Like a Dashboard

People who win at NOI don’t calculate it once and frame it on the wall. They track it. Monthly.
They compare actuals to underwriting, spot expense creep early, and adjust operations before the property “mysteriously”
underperforms for a whole year. The most practical experience-based takeaway is simple:
NOI isn’t just a deal metricit’s a management metric.