NOI is the foundation figure in income property analysis. Cap rate, debt yield and most valuation work are built on it. Its defining feature is what it leaves out: financing. Two identical buildings have the same NOI whether one is owned free and clear and the other carries 80% leverage — which is exactly what makes it useful for comparing properties.
The formula
NOI = Effective Gross Income − Operating Expenses. Effective gross income is potential rent plus other income (parking, laundry, pet fees) minus vacancy and credit loss. A fourplex with $96,000 of potential annual rent, 5% vacancy and $34,000 of operating expenses has an effective gross income of $91,200 and an NOI of $57,200.
What counts as an operating expense
Property taxes, insurance, property management, repairs and maintenance, utilities the owner pays, landscaping and snow removal, HOA dues, licensing and inspection fees, and an allowance for turnover. These are the recurring costs of keeping the property running and rented.
What does not count — and this is where NOI goes wrong
Four exclusions, all of them commonly violated. Mortgage principal and interest are not operating expenses — that is the whole point of the metric. Neither is depreciation, which is an accounting entry rather than a cash cost. Nor capital expenditures: a new roof is a capital item, not a repair. Nor income tax. An NOI with the mortgage subtracted is not an NOI, and a cap rate built on one is meaningless.
Trailing versus pro forma, and why it matters more than the number
A trailing NOI reflects what the property actually produced over the last twelve months. A pro forma NOI reflects what a seller believes it could produce — typically at full occupancy, market rents and optimistic expense ratios. Listing packages quote pro forma almost universally. The gap between the two is frequently 15–30%, and since cap rate is NOI divided by price, a pro forma NOI makes a property look meaningfully cheaper than it is. Ask which one you are being shown, every time.
How NOI relates to your financing
NOI does not determine residential DSCR qualification — that runs on gross rent against the full payment, a different calculation covered under DSCR. NOI does drive valuation, which drives the appraisal, which drives how much you can borrow. Strengthening NOI by raising rents or cutting controllable expenses raises the appraised value on an income approach, and that is what creates room for a cash-out refinance later.
Net Operating Income (NOI) FAQ
No. NOI is calculated before debt service. Subtracting the mortgage gives you cash flow before taxes, which is a different and also useful number — but it is not NOI.
No. Depreciation is a non-cash accounting deduction. NOI measures cash operations.
No. Routine repairs are operating expenses; replacing a roof, HVAC system or parking lot is capital. Many analysts do subtract a capital reserve separately to get a more honest picture.
There is no universal figure — NOI is an absolute dollar amount, so it only means something relative to price, which is what the cap rate expresses.
Raise rents to market, add income streams, cut controllable expenses, reduce vacancy, or appeal an over-assessed property tax bill. Tax appeals are the most overlooked and often the fastest.
Not for DSCR qualification, which uses gross rent against PITIA. NOI still matters indirectly through the income approach on the appraisal.