THE SHORT ANSWER
Net operating income, or NOI, is property income after recurring operating expenses, before debt service, income taxes, and depreciation. It helps separate the building's operations from the owner's financing. NOI is a starting point for analysis; it is not automatically money available to distribute.
TRY THE MATH
NOI calculator
Hypothetical example values. Replace them with your own assumptions. Nothing is saved or sent.
An educational calculation, not a property valuation or financing decision. Definitions and lender adjustments can differ. Check the guide’s assumptions and limitations.
How to calculate NOI
NOI = effective gross income − operating expenses. Effective gross income reflects rent and other property income after vacancy, concessions, and collection losses. Operating expenses are the ongoing costs of running the property.
Keep periods consistent. If income is annual, use annual taxes, insurance, repairs, management, utilities, and other operating costs. Distinguish a bill paid once per year from a monthly bill.
What belongs above and below NOI
Recurring repairs, property taxes, insurance, and management generally belong in operating expenses. Loan principal and interest, depreciation, owner income taxes, and major capital improvements are excluded from the basic NOI used here.
Replacement reserves and capital costs still matter. They are separate deductions in this site's cash-flow model. A lender may use a different definition of underwritten cash flow or reserves. Confirm that definition before comparing its figure with yours.
| Usually included in operating expenses | Usually accounted for separately |
|---|---|
| Property taxes and insurance | Debt principal and interest |
| Routine maintenance and management | Major replacements and renovation spending |
| Owner-paid utilities | Depreciation and income taxes |
A hypothetical NOI example
Assume scheduled annual rent is $240,000, vacancy and collection losses are $18,000, and other income is $6,000. Effective gross income is $228,000. Subtract $100,000 in recurring operating expenses to calculate $128,000 NOI.
If annual loan payments are $80,000 and planned reserves are $12,000, $36,000 remains before income taxes and other cash uses. The NOI stays $128,000 even though financing and reserves reduce available cash. These figures illustrate the method and do not describe an actual investment result.
Check the quality of the inputs
A higher NOI may come from better operations, but it can also come from omitted costs or rent that has not been collected. Compare lease terms with payment records and reconcile expense categories across reporting periods.
Review costs that may change after purchase, such as insurance coverage, assessed taxes, and paid management. Do not assume the seller's expenses automatically become the buyer's expenses.
- Identify whether the figure is historical, annualized, or projected.
- Reconcile claimed one-time adjustments with invoices.
- Keep capital needs visible even when they sit below NOI.
Common questions
Is mortgage interest part of NOI?
No, not in the property-level NOI definition used here. Financing costs are evaluated after NOI.
Is NOI the same as taxable income?
No. Tax calculations can include interest, depreciation, and other adjustments that differ from an operating analysis.
Sources & further reading
- OCC: Commercial Real Estate Lending handbook ↗
- Fannie Mae: Multifamily Analysis of Operations, Form 4254 ↗
- IRS Publication 527: Residential Rental Property ↗
Educational content from Real Estate 101. Updated 2026-09-05. Refer to the original sources and your professional advisers for transaction-specific requirements.