Quick Answer
NOI takes a property's total rental income and subtracts operating expenses like property taxes, insurance, maintenance, property management, and a vacancy allowance, but stops before the mortgage payment. It's the building block behind cap rate and a key input for figuring cash flow, which does include financing costs.
- Formula
- Total income minus operating expenses
- Excludes
- Mortgage principal and interest
- Used to calculate
- Cap rate, and feeds into cash flow
- Typical expenses included
- Taxes, insurance, maintenance, management, vacancy
What Counts as an Operating Expense
Operating expenses used to calculate NOI typically include property taxes, insurance, routine maintenance and repairs, property management fees, and an allowance for vacancy and credit loss. Capital improvements, like a full roof replacement, are usually treated separately rather than as a routine operating expense.
Because NOI excludes the mortgage payment, it reflects how the property itself performs, independent of how any particular buyer chooses to finance it. That's what makes it useful for comparing properties across different buyers and loan structures.
How NOI Connects to Other Metrics
NOI is the numerator in the cap rate formula, calculated by dividing NOI by the property's price. Subtracting the mortgage payment from NOI produces cash flow, the number that reflects what actually lands in an owner's pocket each month.
Because so many investment calculations start with NOI, getting an accurate, honest estimate of income and expenses matters more than almost any other number in the analysis. Our agents can help you evaluate realistic income and expense figures on rental properties across Central Indiana.
Questions About Your Situation?
We'll walk you through it in plain English — no pressure, no obligation.
Frequently Asked Questions — Net operating income (NOI)
Does NOI include the mortgage payment?
No. NOI is calculated before the mortgage. Once the mortgage payment is subtracted from NOI, the result is cash flow.
What expenses are excluded from NOI?
Mortgage payments, income taxes, and capital improvements are generally excluded, along with depreciation, which is a non-cash accounting item.
Why do investors care about NOI specifically?
NOI isolates the property's own performance from financing decisions, which makes it the standard input for cap rate and for comparing properties regardless of how each is financed.
Is NOI the same for every investor on the same property?
It should be close, since NOI is based on the property's actual income and operating costs rather than the buyer's financing, though estimates can vary based on assumptions about vacancy and management costs.