How to Calculate NOI (Net Operating Income) Step by Step

01What NOI Measures

Net operating income (NOI) is the income a property generates from operations after subtracting the costs of running it, but before subtracting anything related to how it's financed or owned. It's the core number behind cap rate and several other rental property metrics, which makes getting the calculation right more important than almost any other figure in your underwriting.

The formula, in its simplest form:

NOI = Gross Operating Income − Operating Expenses

Where gross operating income itself is:

Gross Operating Income = Potential Rental Income − Vacancy and Credit Loss (+ Other Income)

Put together in one line: NOI = (potential rent − vacancy loss + other income) − operating expenses.

02Step 1: Start With Potential Gross Rental Income

This is the total rent the property could collect if every unit were occupied, all year, at market rent. For a single-family rental, this is simply the annual rent. For a multifamily property, add up the market rent for every unit.

Use realistic, current market rent, not an optimistic number from a seller's pro forma. If you're unsure what a unit could realistically rent for, pull comparable listings in the immediate area rather than trusting a number handed to you.

03Step 2: Subtract Vacancy and Credit Loss

No property is occupied 100% of the time, and even good tenants occasionally pay late or not at all. Vacancy and credit loss is an estimate of the income you won't actually collect because of turnover, time spent re-leasing units, and the occasional non-payment.

This step is one of the most commonly skipped parts of a NOI calculation, and skipping it is one of the biggest ways sellers (intentionally or not) inflate the income a property appears to generate. A property that's currently 100% occupied with a great tenant is not the same as a property that will stay 100% occupied forever. Build in a reasonable vacancy assumption based on the property type and local rental market conditions, rather than assuming zero vacancy because the current snapshot looks good.

04Step 3: Add Other Income, If Any

Some properties generate income beyond base rent: laundry machines, parking fees, storage rental, pet rent, or application fees. If these are recurring and realistic, add them in. If they're one-time or speculative, leave them out.

05Step 4: Subtract Operating Expenses

Operating expenses are the recurring costs of running the property. Common categories include:

• Property taxes
• Property insurance
• Property management fees
• Repairs and routine maintenance
• Utilities paid by the owner (common in multifamily)
• Landscaping, snow removal, pest control
• HOA fees, if applicable
• Advertising and leasing costs

Use realistic figures, not the bare minimum. If the seller's operating statement looks unusually low on maintenance or management, ask why, and rebuild the expense estimate using your own reasonable assumptions.

06What NOI Deliberately Excludes

This is where a lot of new investors make mistakes, so it's worth being explicit.

Debt service is never included in NOI. Mortgage principal and interest payments are a financing decision, not an operating cost of the property itself. NOI is designed to represent the income the real estate generates on its own, independent of how a specific buyer chooses to finance the purchase. Including the mortgage payment in NOI is one of the most common calculation errors, and it makes cap rate and other derived metrics meaningless, because two identical properties financed differently would then show different NOI, even though the properties themselves generate the same operating income.

Capital expenditures are not included in NOI. Capital expenditures, sometimes shortened to capex, are major, infrequent expenses that extend the useful life of the property or replace a major system, such as a new roof, a new HVAC system, or a major renovation. These are treated separately from routine operating expenses because they're irregular, often large, and not part of the property's normal year-to-year running costs. Some investors do maintain a capex reserve line item as a planning tool outside of NOI, but the formal NOI calculation itself excludes major capital costs. For more on the distinction, see capital expenditures vs. maintenance.

Depreciation is not included in NOI. Depreciation is an accounting and tax concept, not a real cash cost, so it has no place in an operating income calculation focused on actual cash performance.

Income taxes are not included. NOI is calculated before any income tax considerations, which are specific to the owner's individual tax situation rather than the property itself.

07A Simple Example

Imagine a small rental property with these figures for the year:

Line item	Annual amount
Potential rental income	$24,000
Vacancy and credit loss (estimated at 5%)	−$1,200
Gross operating income	$22,800
Property taxes	−$2,800
Insurance	−$1,200
Repairs and maintenance	−$1,800
Property management (8% of collected rent)	−$1,824
NOI	$15,176

Notice that no mortgage payment and no capital expenditure appear anywhere in this table. Whatever this property's actual financing looks like, and whatever big-ticket replacement it might need in five years, NOI stays the same, because both of those belong to a different part of the analysis.

08Common Mistakes to Avoid

• Including the mortgage payment in operating expenses. This is the single most common error, and it invalidates cap rate and every other metric derived from NOI.
• Forgetting vacancy entirely, especially when working from a seller's current, fully-occupied snapshot.
• Using a seller's operating statement uncritically, without checking whether maintenance, management, and vacancy assumptions are realistic.
• Mixing in capital expenditures as if they were routine annual costs.
• Forgetting recurring "other income" like laundry or parking fees that a seller may have left off their statement.

09Why This Matters

NOI is the numerator in the cap rate formula, and cap rate is one of the most widely used ways to compare rental properties to each other. If your NOI calculation is wrong, every downstream metric built on top of it is wrong too. Once you have a clean NOI figure, you can move on to comparing it against price using the cap rate calculator, and the cap rate guide walks through how to interpret the result.

This article is educational and not personalized investment, tax, or legal advice.