If you’re investing in a rental property, knowing how to calculate NOI (net operating income) is one of the most important skills you can pick up. NOI tells you how much revenue a property generates after covering operating expenses, but before paying the mortgage, taxes, or big-ticket upgrades. Lenders use it. Buyers rely on it. And if you’re trying to grow your portfolio, you should be using it too!
In this guide, I’ll walk you through exactly how to calculate net operating income, how to use it, and how to tell if your number’s any good.
Calculating net operating income (NOI): Formula
Figuring out the NOI is a two-step process.
- Add up all the income your property earns.
- Subtract the expenses that keep it running (like vacancy losses and operating expenses).
Then you’re done! Let’s break it down.
Net Operating Income (NOI) = (Gross Income – Vacancy & Credit Loss) – Operating Expenses
Some websites simplify the NOI formula to just gross income minus operating expenses, but that skips an important step. I included vacancy & credit loss in the formula because it gives you a more accurate picture of what the property actually earns, especially if it’s not fully rented year-round. Investors, lenders, and appraisers often use this version when analyzing a property’s true income potential.
Here’s how the numbers come together:
- Gross income: This refers to all the money your rental property generates before deducting any expenses. It includes rent, of course, but also items such as pet fees, parking spaces, laundry, storage lockers, and other optional extras that tenants might pay for.
- Vacancy and credit loss: You won’t collect 100% of the potential rent all the time. Some units remain vacant, and tenants sometimes fail to pay. This part of the formula accounts for that missing income. If you don’t have actual financials, use market data from similar rentals in the area to estimate vacancy rate — 5% is a common starting point for single-family rentals, but it may be higher or lower depending on the market.
- Operating expenses: These are the ongoing costs required to maintain and operate your rental property effectively. They don’t include your mortgage payments or major upgrades — just the stuff you pay to maintain the day-to-day. Common operating expenses include:
Exclude the following: mortgage payments, capital improvements such as a new roof or HVAC replacement, depreciation, and income taxes. These don’t factor into NOI because they fall outside regular operating costs. They’re either loan-related, long-term upgrades, or accounting entries that don’t affect cash flow.
Want an easier way to track your rental income and operating expenses? Baselane is a property management platform that helps landlords organize their finances, collect rent, and automate expense tracking, so running NOI numbers takes minutes, not hours.
| Annual rent ($2,000 x 12) | $24,000 |
|---|---|
| Laundry income | $600 |
| Total gross income | $24,600 |
| Vacancy & credit loss (5%) | –$1,230 |
| Effective income | $23,370 |
| Property taxes and insurance | –$3,200 |
| Repairs and maintenance | –$1,500 |
| Property management (8%) | –$1,870 |
| Utilities | –$900 |
| Total operating expenses | –$7,470 |
| Net operating income (NOI) | $15,900 |
So, in this case, your net operating income is $15,900 per year. That’s the number you’ll use to evaluate performance, calculate cap rate, or see if the property can support financing.
When to calculate NOI
You won’t need to run the NOI formula every day, but it’s a number you’ll come back to often. Here are the times you’ll want to calculate it:
- Analyzing a potential deal: Before making an offer, calculate the NOI to see if the income supports the asking price. It helps you quickly determine whether the deal is worth digging into.
- Comparing two or more properties: NOI provides a clear, side-by-side comparison of which investment is likely to perform better, beyond just price or location.
- Getting ready to talk to a lender: Most banks use NOI to figure out your debt service coverage ratio (DSCR). A solid number makes financing (and even refinancing) a lot smoother.
- Reviewing annual performance: Tracking your NOI year over year helps you catch rising expenses, missed income opportunities, or early signs of trouble.
- Estimating resale value: Use your NOI and the local market cap rate to get a realistic idea of what your property could sell for.
- Planning upgrades or rent increases: If you want to raise rent or reduce costs, plugging your projections into the NOI formula will let you see how much they’ll move the needle.
What counts as a good NOI?
Net operating income isn’t good or bad on its own. It has to be weighed against the property’s price, the local market, and, of course, your investment goals. Here’s how to gauge whether your NOI is pulling its weight:
-
Check the implied cap rate:
Divide NOI by the asking price. In most markets, stabilized rentals trading at 5-8% are considered solid. A number below that might still be fine if the area has strong appreciation potential.
-
Compare to similar properties:
Pull recent sales or listings for properties with similar age, size, and location. If your NOI is higher and expenses are in line, you’re looking at an operational win.
-
Run the lender’s DSCR test:
Banks require NOI to cover loan payments by at least 1.20 times. If you’re below that, either the price is too high, or the income/expenses need work.
-
Look for growth potential:
A modest NOI today can still be considered “good” if you have clear upside potential. Think below-market rents, unused storage space, or expense cuts you can make on day one.
-
Factor in your return target:
If you’re aiming for a 10% cash-on-cash return and the projected NOI meets or beats that after financing, it’s good by your standards, no matter what the averages say.
NOI vs other metrics: What to use & when
While NOI is a key part of analyzing a property, it’s not the only way to tell if a deal is right for you. Depending on the situation, other metrics may provide a clearer picture, especially if the property isn’t stabilized yet or you’re comparing multiple options.
Below are the most common metrics you’ll see in real estate investing, what they measure, and when it makes the most sense to use them. In most cases, you’ll use NOI as a starting point, then build on it with one of these.
| Cap rate | Property’s unlevered return | Comparing two stabilized properties or estimating market value quickly |
| Cash flow | Dollars left in your pocket each month | Making sure rent will cover the mortgage and expenses |
| 1 percent rule | Quick sniff test for single-family and small multifamily properties | Screening lots of listings before running full numbers |
| Cash-on-cash return | Return on the cash you actually put in | Gauging true investor yield after financing |
| Gross rental yield | Rent relative to total acquisition cost | Comparing markets or property types at a glance |
| Comparable sales/rents | Market prices and rent levels on similar properties | Valuing or underwriting when a property isn’t fully stabilized |
| Debt service coverage ratio (DSCR) | Lender’s safety margin | Checking loan eligibility or refinancing potential |
| Return on investment | Total return after sale or refinancing | Measuring overall success once you exit the deal |
Pro-tip: Start with NOI to understand pure operating performance, then grab the metric that answers your next question: value (cap rate), lender fit (DSCR), investor payoff (cash-on-cash return), or rapid screening (1 percent rule).
Frequently asked questions (FAQs)
What is net operating income (NOI)?
Net operating income (NOI) is how much money your property makes after covering its regular operating expenses. It shows your property’s ability to generate profit before paying your mortgage, taxes, or major repairs and upgrades. It’s one of the most important numbers in real estate investing because it’s used to compare deals, estimate property value, and assess cash flow potential.
What are the formulas for the NOI approach?
The basic formula is: NOI = Gross Income – Operating Expenses. For a more detailed and accurate view, subtract vacancy & credit loss from gross income first to get your effective income, and then subtract operating expenses from that.
What is a good NOI for a rental property?
There’s no one-size-fits-all number — it depends on the property’s price, location, and financing. Instead of focusing on a “good” NOI, consider how it compares to the cost, using metrics such as the cap rate or cash-on-cash return.
How to calculate net income from a rental property?
Start with your rental income (plus any additional fees), subtract vacancy loss, and then subtract all operating expenses. What’s left is your NOI — your property’s net income before debt and taxes.
Your take
Now that you know how to find net operating income, you can use it to make smarter, faster decisions on any real estate investment deal. It’s a simple formula, but it gives you a clear look at a property’s real performance. Have any questions on how to calculate net operating income? Let me know in the comments!
Add comment