What is NOI in real estate?
Net operating income (NOI) is the income a property collects in a year, less the costs of running it. It is worked out before loan payments and income tax, so it describes the property itself, not the owner’s financing or tax position.
How NOI is worked out
NOI = Rent and other income collected − Operating expenses
- A duplex rents for $2,400 a month in total: $28,800 a year if it were always full.
- Allowing 5% for vacancy and unpaid rent takes off $1,440, leaving $27,360 collected.
- Operating expenses for the year: property tax $3,600, insurance $1,400, repairs and maintenance $1,500, management $2,000 and other costs $500. Total $9,000.
- $27,360 − $9,000 = $18,360 net operating income.
Open this example in the cap rate calculator, which shows NOI in its working, or use the rental property calculator to enter each expense separately.
What counts as an operating expense
Operating expenses are the regular costs of keeping the property let and in working order. The line is drawn at costs that belong to the owner rather than the property.
| Included in NOI | Left out of NOI |
|---|---|
| Property tax | Mortgage payments, both interest and principal |
| Insurance | Income tax on the rent |
| Repairs and maintenance | Depreciation |
| Property management | Improvements, such as a new roof or an addition |
| HOA dues | Costs of buying or selling the property |
| Utilities the owner pays | The owner’s own time, unless a management cost is allowed for it |
| Advertising, legal and accounting |
Property tax is an operating expense. Income tax is not. The two are often confused.
Practice varies on one item: money set aside each year for future replacements such as a roof. Many lenders subtract a replacement reserve when they work out NOI, and many listings do not. When you compare two figures, check that both treat it the same way.
NOI is not cash flow, and not taxable income
Cash flow is what is left after the loan is paid. A buyer of the duplex who borrows $225,000 at 7% over 30 years pays $17,963 a year, so cash flow is $18,360 − $17,963 = $397. A buyer who pays cash keeps the whole $18,360. The NOI is the same for both.
Taxable income is different again. IRS Publication 527 lists mortgage interest and depreciation among the most common rental expenses an owner can deduct, and neither is part of NOI. It also separates repairs, which can be deducted, from improvements, which must be capitalized and depreciated.
- NOI for the year is $18,360.
- In the first year of that loan, $15,678 of the payments is interest.
- If the building is 80% of the $300,000 price, depreciation over 27.5 years is $8,727 for a full year.
- $18,360 − $15,678 − $8,727 = a loss of $6,045 on paper, in a year when the property took in $397 more cash than it paid out.
This is a simplified picture. The first year’s depreciation is smaller under the IRS mid-month rule, and tax rules can limit how rental losses are used. The depreciation calculator shows the year-by-year figures. A tax professional can tell you how the rules apply to you.
What NOI is used for
- Cap rate: NOI ÷ price. For the duplex, $18,360 ÷ $300,000 = 6.12%. See what is a good cap rate?
- Value: NOI ÷ the cap rate similar properties sell at. $18,360 ÷ 6% = $306,000.
- DSCR: NOI ÷ a year of loan payments. $18,360 ÷ $17,963 = 1.02. Many lenders look for more than that on a rental loan, so check with the DSCR calculator.
- Cash flow: NOI less loan payments, here $397 a year.
Why small changes in NOI matter
Because value is NOI divided by a cap rate, each dollar of NOI is worth many dollars of price. Raising the rent on the duplex by $100 a month adds $1,200 a year, or $1,140 after the 5% vacancy allowance. In a market where similar properties sell at a 6% cap rate, that is about $19,000 of value.
It works in reverse as well. An expense left out of the figures inflates NOI, and with it the price the figures seem to justify.
Common mistakes
- Using the rent a unit could earn instead of the rent tenants pay now.
- Leaving out vacancy. No rental is full every month of every year.
- Leaving out management because you plan to do it yourself.
- Counting the mortgage as an operating expense, which understates NOI and mixes up the property with the loan.
- Treating a seller’s NOI as fact. Ask for the leases, the tax bill, the insurance bill and a year of repair invoices, and rebuild it.
The results from the calculators on this site are estimates, not advice.
Common questions
Does NOI include the mortgage?
No. NOI is worked out before loan payments, both interest and principal. That is what lets two properties be compared whatever their owners borrowed. Cash flow is NOI less the loan payments.
Does NOI include property taxes?
Yes. Property tax is an operating expense and reduces NOI. Income tax on the rent is not included, because it depends on the owner, not the property.
Does NOI include depreciation?
No. Depreciation is a tax deduction, not a cost of running the property, so it is left out of NOI. IRS Publication 527 lists it among the expenses an owner can deduct from rental income for tax.
Are large repairs part of NOI?
Ordinary repairs and maintenance are. Improvements such as a new roof or an addition are not operating expenses. Some lenders and investors subtract a yearly reserve for such replacements when they work out NOI, so check how a figure was calculated.
What is a good NOI?
There is no good figure on its own, because it depends on the size and price of the property. Divide NOI by the price to get the cap rate, which can be compared between properties.
What is the difference between NOI and cash flow?
NOI is income less operating expenses, before the loan. Cash flow is what is left after loan payments. A property bought with cash has cash flow equal to its NOI, before tax and large one-off costs.
Sources
- IRS Publication 527 (2025), Residential Rental Property, Types of Expenses; Repairs and Improvements. Retrieved November 12, 2026.