Net Operating Income (NOI)

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Net operating income (NOI) is used to measure how much cash flow a property makes. To calculate net operating income, you subtract operating expenses from the property’s operating revenue. In other words, NOI is the amount of money that a rental property makes after subtracting the costs to operate the property.

Net Operating Income (NOI) Formula
Net Operating Income = Operating Income - Operating Expenses

NOI Calculator

Operating Income
Monthly Rental Income
Monthly Other Income
Average Vacant Months in a Year
Operating Expenses
Annual Property Tax
Annual Maintenance and Repair Expenses
Annual Insurance Expenses
Annual Property Management Fees
Annual Cost of Utilities
Other Annual Expenses
Total Operating Income (Annual)
Total Operating Expenses (Annual)
Net Operating Income (Annual)

Net Operating Income (NOI) Index for New York

NOI 1-Year Change
NOI 5-Year Change
NOI 10-Year Change
NOI Index
Mortgage Rate
Cap Rate Index
Price Index
Cap Rate Index:
The capitalization rate of an average multi-family property relative to a benchmark of 100 set in the year 2000
Mortgage Rate:
The average mortgage rate across the US
Price Index:
The prices of multi-family property units relative to a benchmark of 100 set in the year 2000
NOI Index:
The net operating income (rental income minus operating expenses) of an average multi-family property relative to a benchmark of 100 set in the year 2000

What is NOI in real estate?

NOI is used by real estate investors to quickly see how much income a property would make. NOI doesn’t include costs that can vary from investor to investor, such as mortgage rates, which allows for a more objective view when looking for real estate or rental properties.

However, NOI does not give investors the bigger picture when comparing rental properties. You might be told that a rental property has an annual NOI of $50,000. On its own, net operating income doesn’t tell you much besides that the property is profitable due to a positive NOI, and that it’s annual cash flow is $50,000.

To find out if this rental property would be a worthwhile investment, you would want to consider the price of the property. If the property costs $100,000 and it has an annual NOI of $50,000, the property might be a great investment. If the property costs $50 million for an annual NOI of $50,000, then it might be less desirable. Similar to return on investment (ROI), you need to take the amount of capital required into account, not just how much your investment will make.

Net operating income is used to calculate the capitalization rate, which is the property’s net operating income divided by the property’s cost or market value. This provides a percentage, called the cap rate, that can be used to easily compare between real estate properties with different prices and NOI. To find your property’s cap rate, view average cap rates in the U.S. and to see cap rate payback periods, visit our cap rate calculator.

For an even more comprehensive view which calculates ROI and the cap rate by taking into account mortgages costs, property prices, and closing costs, visit our rental property calculator.

How To Calculate Net Operating Income

To calculate net operating income, you can either use historical income and expense data, or you can use estimated future income and expenses based on a projected forecast. For projected future net operating income, a pro forma financial statement would be used. Operating income and operating expenses are the components that make up net operating income.

Operating Income

Operating income for real estate properties would be potential rental income and other income generated subtracted by any vacancy or credit losses.

Potential rental income is the maximum amount that you would collect in rent if your property is fully occupied at all times. If you charge a commercial tenant $2,000 per month in rent, your potential rental income would be $24,000 a year.

This amount is then adjusted for any vacancy or credit losses. Vacancy losses is the amount of rental income that you miss out on when your rental units are not occupied. If your unit is only occupied 10 months in a year and it is vacant for 2 months, your vacancy losses for the year would be $4,000 (from $2,000 loss rent per month). This vacancy period might be due to downtime between tenants moving in and out.

Credit losses happen when a tenant doesn’t pay their rent. Similar to vacancy losses, you are not earning any rental income during the time that a tenant doesn’t pay rent, even if they are still occupying your unit. You will need to evict the tenant, which will take time. Credit losses accounts for the loss rental income during the time it takes to evict the tenant.

Operating income also includes other income generated by your property besides rental income. This other income might include revenue made from parking fees, vending machines, or laundry services.

Operating Expenses

Operating expenses are the costs associated with the daily operations of the property. This is the amount of money that you need to spend in order to earn your operating income. Operating expenses include property tax, maintenance and repairs, property insurance, landlord insurance, utilities, and management fees.

What is not included in operating expenses?

Operating expenses do not include costs that are not required to operate the property. For example, you do not need to have a mortgage to operate the property, but you do need to pay property taxes at the bare minimum.

When calculating NOI, do not include mortgage interest, mortgage payments, any income taxes, depreciation, or large capital expenditures that aren’t conducted regularly.

Pro Forma in Real Estate

Pro forma projections are used in real estate to calculate a property’s estimated net operating income and cash flow in the future. Net operating income from pro forma is just an estimate, which is why it is used when current data isn’t available for a property. For example, an investor might calculate pro forma for a property under construction, or for a potential investment opportunity that hasn’t been built yet. If you are analyzing an existing rental property, you’ll be able to calculate the property’s actual net operating income and cash flow. However, income, vacancy rates, and expenses can change in the future. That’s why pro forma can still be used to project the future net operating income of existing rental and commercial properties.

Pro Forma Example

To calculate pro forma, you’ll be estimating a property’s income, expenses, and vacancy rate. You might base this on actual values from comparable properties nearby. For example, let’s say that an investor is looking to purchase a 3-unit rental property and wants to estimate net operating income for the next five years. Here is what a pro forma 5-year projection might look like:

Example of a 5-Year Real Estate Pro Forma Projection

Year 1Year 2Year 3
Unit 1$20,000$20,500$21,000
Unit 2$25,000$26,000$26,500
Unit 3$15,000$16,000$17,000
Gross Potential Rental Income$60,000$62,500$64,500
Vacancy & Credit Loss (10%)($6,000)($6,250)($6,450)
Effective Rental Income$54,000$56,250$58,050
Property Taxes$10,000$10,500$11,000
Property Maintenance$5,000$5,500$6,000
Property Insurance$3,000$3,000$3,000
Property Management Fees$5,000$5,000$5,000
Total Operating Expenses($26,000)($27,000)($28,000)
Net Operating Income (NOI)$28,000$29,250$30,080
Year 4Year 5
Unit 1$21,500$22,000
Unit 2$27,000$27,000
Unit 3$18,000$19,000
Gross Potential Rental Income$66,500$68,000
Vacancy & Credit Loss (10%)($6,650)($6,800)
Effective Rental Income$59,850$61,200
Property Taxes$11,500$12,000
Property Maintenance$6,500$7,000
Property Insurance$3,000$3,000
Property Management Fees$5,000$5,000
Total Operating Expenses($29,000)($30,000)
Net Operating Income (NOI)$30,850$31,200

Gross Potential Rental Income vs Effective Rental Income

Gross potential income (GPI), which is also called gross potential rent (GPR), is the maximum rent that a property can make. GPI assumes that there are no vacancy or credit losses. This means that the rental units are fully rented and that there is always a tenant that pays rent for every unit available.

In real life, it's possible for units to not always have a tenant. Vacant units won't earn any income, and downtime between tenants moving out and a new tenant moving in can also result in vacancy losses. Effective rental income, which is also called effective gross income (EGI), takes into account vacancy and credit losses.

Calculating Gross Potential Income

Since gross potential income assumes a 100% occupancy rate, gross potential income is simply the rent charged. For example, if a landlord charges $1,000 monthly rent for a condo, then that condo’s monthly gross potential income is $1,000. Likewise, the condo’s annual gross potential income is $12,000.

Calculating Effective Rental Income

In order to calculate effective rental income, you’ll need to know the vacancy rate for your rental property. While it’s not possible to know the exact vacancy rate for your property in the future, you can still estimate it based on comparable properties using historical data.

For example, if a landlord charges $1,000 monthly rent and there is a predicted vacancy rate of 5%, then the property’s monthly effective rental income would be $950. The annual effective rental income of the property would be $11,400.

Operating Income vs. Net Income

The difference between net operating income and net income is that net income takes into account any non-operating income and expenses. When a company earns or pays money that isn’t related to the company’s main business, these are called non-operating income and expenses. For example, a rental property would be focused on earning rental income from tenants, and its expenses are the costs of keeping the rental property running. Non-operating expenses would include mortgage payments and income taxes. Non-operating income might include gains on the sale of assets, such as if the property appreciated in value and was sold for a capital gain.

Capitalization Rate vs. Net Operating Income

Capitalization rate, or cap rate, is used to compare a property’s net operating income with the cost of purchasing the property. This allows investors and landlords to determine whether a property is worth purchasing. The higher a property’s net operating income, the higher the cap rate. However, the higher a property’s market value, the lower the cap rate.

For example, if the annual net operating income is $28,000 and the market price of the property is $500,000, then the cap rate is 5.6%. As a comparison, the national average cap rate for suburban multi-family homes was 5.37% in 2019. If the market value for the same property was $1 million with an NOI of $28,000, then the cap rate would be 2.8%.

Year 1Year 2Year 3
Net Operating Income (NOI)$28,000$29,250$30,080
Market Value$500,000$525,000$550,000
Cap Rate5.6%5.6%5.5%
Year 4Year 5
Net Operating Income (NOI)$30,850$31,200
Market Value$575,000$600,000
Cap Rate5.4%5.2%

How to Maximize Net Operating Income

Increasing net operating income will result in landlords making more money, but just how can landlords maximize net operating income? Since NOI is made up of three main factors, a landlord will need to do at least one of the following in order to maximize net operating income:

  1. Increase Rental Income

    Rent is how rental properties make money, but just how can landlords increase rental income? One way is by simply charging more in rent upfront. Charging a higher price can backfire if you set it too high, which is why you’ll need to back up your premium rent with a premium home.

    You can also increase your rental income over time by building in automatic annual rent increases into your lease agreements, known as rent escalator clauses. However, some states may have rent caps that can limit your rent increases. For example, California's Tenant Protection Act of 2019 limits annual rent increases to 5% plus the annual cost of living increase, up to a maximum annual rent increase of 10%. This means that you can increase your net operating income by a minimum of 5% every year, plus additional increases to account for inflation.

  2. Decrease Vacancy

    Having vacancies means that you’re leaving money on the table. Unless you already have a 0% vacancy rate, you can help decrease your vacancy rate by signing long-term leases and having low tenant turnover. When a tenant moves out, you’ll need to spend time and money in order to find a new tenant. There’s also downtime between tenants where no rent will be paid. Reducing turnover means that there are fewer partially occupied months and prorated rents. Long-term leases, which can stretch out for several years, ensure that your rental units stay occupied and revenue-generating.

  3. Decrease Expenses

    The first two points are based on increasing revenue, but this last point is on cutting costs. As a landlord, you’ll have operating expenses that are often a large proportion of your rental income. By reducing your costs, such as decreasing the cost of utilities by using more energy-efficient technologies or reducing the cost of landlord insurance, you will be able to keep more of your rental income as net operating income.

While maximizing net operating income can increase cash flow today, landlords should avoid strategies that can hurt the long-term profitability of their rental properties. For example, cutting costs by reducing money allocated for repairs and maintenance can temporarily increase net income today, but can lead to larger expenses in the future. Not saving up for a large enough reserve fund can also lead to landlords scrambling for funds to make large repairs.

NOI Metrics for Real Estate Investors

Debt-Service Coverage Ratio (DSCR)

Just like how individuals will have their debt-to-income (DTI) ratio looked at when applying for a mortgage, a property’s debt-service coverage ratio (DSCR) is used by commercial lenders to qualify you for a DSCR loan. To calculate a property’s debt-service coverage ratio, you will divide net operating income by the property’s total debt service. In the case of a rental property, that would be its mortgage payments.

For example, if the property has a net operating income of $50,000 and needs to make $25,000 in annual mortgage payments, then the DSCR ratio is 2.00.

Net Operating Income$50,000
Total Debt Service$25,000
Debt-Service Coverage Ratio2.00

The higher the net operating income is, the higher the DSCR becomes. The larger the required mortgage payments, the smaller DSCR becomes. A higher DSCR is better, and commercial lenders will have a minimum DSCR requirement for commercial real estate loans. Commercial properties generally require a DSCR of at least 1.25. This means that a commercial property should have enough net operating income to cover 125% of its annual mortgage payments.

Net Income Multiplier

Net income multiplier (NIM), which is the property's purchase price divided by its net operating income, measures the price of the property as a multiple of how much income it can generate. This makes the net income multiplier the inverse of the cap rate. The higher the NIM, the more the property costs compared to the income it can make, and the lower the cap rate. The lower the net income multiplier, the better.

For example, if net operating income was $50,000 and the property’s purchase price was $500,000, then the net income multiplier would be 10x.

Net Operating Income$50,000
Property’s Purchase Price$500,000
Net Income Multiplier10x


Net operating income and EBITDA refer to earnings before interest, taxes, depreciation, and amortization, and both measure profit. The difference between NOI and EBITDA is that NOI measures the profit of a property, while EBITDA measures the profit of a company.

For example, if you were to measure the DSCR of a rental property, you would divide NOI by the total debt service. However, to measure the DSCR of a company, you would divide EBITDA by the company’s total debt service. Net operating income focuses on real estate, specifically on individual properties, while EBITDA applies to general companies.

Cash On Cash Returns

Cash-on-cash return measures how much cash a property makes compared to how much cash it cost to purchase the property. Cash-on-cash return is different from the cap rate because it takes into account the cost of any mortgage loans required for the property, and it also measures cash flow, rather than net operating income.

To calculate cash-on-cash returns, subtract annual mortgage payments from the property’s net operating income. This gives you the property’s cash flow before tax, which will then be divided by the cash invested in the property. If a mortgage loan was used to purchase the property, less cash would be needed. As a result, a mortgage creates leverage which increases cash-on-cash returns but doesn’t increase the cap rate.

For example, let’s say that a property costs $500,000 and has a net operating income of $50,000 annually before tax. If it was purchased entirely using cash, the cash-on-cash return would be 10%.

Net Cash Flow$50,000
Cash Invested$500,000
Cash-on-Cash Return10%

If it was purchased using a mortgage with a 30% down payment, then only $150,000 in cash would be needed for the down payment. To calculate the cash-on-cash return, the annual net operating income of $50,000 would be subtracted by the annual mortgage payments. If the annual payments were $20,000, then the net cash flow before tax would be $30,000. Dividing this by the $150,000 in cash invested gives a cash-on-cash return of 20%.

Net Cash Flow$30,000
Cash Invested$150,000
Cash-on-Cash Return20%

The smaller the down payment, the larger the cash-on-cash return would be. Having a small down payment results in higher leverage. This magnifies the return of the property, but it can also magnify losses.

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