Net Operating Income (NOI)

Net operating income (NOI) is a rental property's income minus its operating expenses, calculated before any mortgage or loan payments.

Net operating income — NOI — is what a rental property earns after operating expenses but before the mortgage. Start with the income the property actually collects, subtract operating costs — property taxes, insurance, management, maintenance, utilities the owner pays, and an allowance for vacancy — and what remains is NOI. Debt service is deliberately left out, because NOI measures the property, not the loan.

A hypothetical single-family rental: $1,500 a month in rent is $18,000 a year. Subtract $1,200 for a vacancy allowance, $2,400 for taxes and insurance, $1,600 for management, and $800 for maintenance, and NOI is $12,000. That number feeds directly into cap rate — the same property priced at $150,000 sits at an 8% cap — which is why NOI is the backbone of most rental valuation.

Beginners get NOI wrong in both directions. Some subtract the mortgage payment, which turns NOI into cash flow and breaks every cap-rate comparison built on it. Others take a seller's pro-forma at face value — projected rents, zero vacancy, suspiciously thin expenses — instead of demanding actuals: the lease, the tax bill, real management and repair history. The gap between pro-forma NOI and actual NOI is where bad rental purchases are made. Verify the income, price the expenses honestly, and let the real NOI set what you pay.