What is Net Operating Income (NOI) in Real Estate?

Net operating income tells you how much money a property actually makes before the bank and the tax collector take their cut. It's one of the most tested numbers on the real estate exam, and one of the most useful in real life.

Below you'll get the plain-English definition, the exact formula, a worked example with real numbers, what counts and what doesn't, what a "good" NOI looks like, and how NOI connects to cap rate. By the end, you can calculate it in your sleep, on the exam or on a real deal.

What is net operating income?

Net operating income (NOI) is a property's total operating income minus its operating expenses, before any mortgage payments or income taxes. Net operating income is the annual profit a property produces from running it, before financing costs and income taxes.

That income comes from rent plus any extra the property earns, like parking, laundry, storage, or pet fees. The expenses are what it costs to keep the place running. NOI strips out the loan and income taxes on purpose, so you see how the property itself performs, no matter who owns it or how they paid for it.

How do you calculate NOI?

To calculate NOI, subtract operating expenses from effective gross income. In one line:

NOI = effective gross income − operating expenses

There are two pieces to get right.

Effective gross income

Effective gross income is all the money a property actually collects: its potential rent plus other income, minus expected vacancy and credit losses. You start with the full rent the property could earn if every unit were filled, add other income like parking and laundry, then subtract what you expect to lose to empty units and tenants who don't pay. The current article skips this step, which is why its example looks off. Vacancy isn't a separate line tacked on at the end. It's part of figuring out the real income first.

Operating expenses

Operating expenses are the recurring costs of running the property. They include property taxes, insurance, property management, utilities, maintenance and repairs, marketing, and supplies. Property taxes count here. Income taxes do not.

What NOI leaves out

NOI does not include mortgage payments, income taxes, depreciation, or large capital expenditures like a new roof. Leaving out the loan is the whole point. Two investors can buy the same building with different down payments and loans, but the property's NOI stays the same. That's what makes it a fair way to compare deals.

NOI example: how to calculate it step by step

Here's how NOI works with real numbers. Say a client is looking at a small apartment building with these annual figures:

Walk it through. Start with $150,000 in potential rent and add $10,000 in other income for $160,000 in gross potential income. Subtract $8,000 in vacancy and credit losses (about 5 percent) to get $152,000 in effective gross income. Then subtract $52,000 in operating expenses. The NOI is $100,000.

That $100,000 is what the property earns from operations in a year, before any loan payment. It's the number you take into every other calculation.

What is a good NOI?

A good NOI is positive, steady or rising over time, and strong compared with similar properties in the same market. There's no single dollar figure that counts as "good," because a great NOI for a duplex would be a terrible one for a 200-unit complex.

Judge it three ways. Is it positive, meaning the property earns more than it costs to run? Is it trending up year over year, which points to rent growth or sharper management? And how does it stack up against comparable buildings nearby? A rising NOI is one of the clearest signs a property is being run well.

What's the difference between NOI and cap rate?

NOI is a dollar amount. Cap rate is NOI divided by the property's value, written as a percentage. In one line:

Cap rate = NOI ÷ property value

So NOI isn't "better than" cap rate. Cap rate is built from NOI. Using the example above, a $100,000 NOI on a property worth $1.25 million works out to an 8 percent cap rate. The same logic powers other metrics too: cash-on-cash return, return on investment, and debt service coverage all start with NOI. Get NOI right and the rest of your analysis stands on solid ground. Get it wrong and every number after it is wrong too.

Why NOI matters for the real estate exam

On the real estate exam, you'll be expected to calculate NOI and use it to find cap rate or a property's value. Most NOI questions are testing whether you know what to leave out, so watch three traps: never subtract the mortgage, always include property taxes as an operating expense, and never subtract income taxes.

NOI also shows up the moment you start working with investors in the real world, so it's worth knowing cold. If you're building toward that, it pairs well with the basics of real estate investing and with the other formulas covered in our guide to passing the real estate exam. It's also one of many vocabulary terms the test loves, right alongside concepts like novation.

The bottom line

Net operating income is income minus operating expenses, with the mortgage and income taxes left out. Nail the effective gross income step, remember what NOI excludes, and you can find a property's cap rate and value in seconds. It's a small formula that does a lot of heavy lifting, on the exam and on real deals.

Net operating income is exactly the kind of concept our crash course makes click in minutes instead of hours. Start the real estate exam prep crash course and get video lessons, unlimited practice exams, flashcards, and a study guide built around the exact concepts the national exam tests.