Net Operating Income (NOI) Calculator
Enter your property's rental income, vacancy rate, and itemized operating expenses to calculate net operating income (NOI) instantly. The calculator also derives the capitalization rate (cap rate) from your property value and shows a full income-to-NOI waterfall so you can see exactly where money is going.
What is net operating income (NOI)?
Net operating income is the annual income generated by an income-producing property after subtracting all operating expenses, but before accounting for mortgage payments (debt service), capital expenditures, depreciation, and income taxes. It is the foundational metric in commercial and residential real estate analysis because it measures a property's ability to generate cash purely from operations, independent of how the purchase was financed. Lenders, appraisers, and investors all use NOI as the starting point for valuing income property and sizing loans.
How to calculate NOI: the formula
The NOI calculation flows in four steps. First, add annual gross rent to other income (parking, laundry, storage, etc.) to get potential gross income (PGI). Second, subtract vacancy loss from PGI - typically estimated as a percentage of gross rent - to get effective gross income (EGI). Third, total all recurring operating expenses: property tax, insurance, property management fees, maintenance, repairs, and any other operating costs. Fourth, subtract total operating expenses from EGI: NOI = EGI - Total Operating Expenses. Mortgage principal and interest are deliberately excluded because NOI is meant to reflect the property's earning power, not the buyer's financing choice.
Cap rate: putting NOI to work
The capitalization rate (cap rate) divides NOI by the current market value of the property: Cap Rate = NOI / Property Value. It tells you the annual return you would earn if you bought the property with all cash and no debt. A higher cap rate implies higher return but usually also higher perceived risk or a less desirable location. Investors buying in major metros like New York or San Francisco often accept cap rates of 3-5%, while investors in secondary and tertiary markets seek 6-9% or more. You can also use cap rate in reverse: if you know the market cap rate for a property type, divide your NOI by that rate to estimate the property's value (Value = NOI / Cap Rate). This is how appraisers use the income approach to property valuation.
NOI vs. cash flow: a key distinction
NOI and cash flow are related but different. Cash flow (also called cash-on-cash return when divided by equity invested) starts from NOI and then subtracts annual debt service (mortgage principal plus interest). A property with strong NOI can still produce weak cash flow if it carries heavy debt. Conversely, a property with modest NOI can generate excellent cash flow if purchased with a large down payment or all cash. Always calculate both: NOI tells you about the asset itself, cash flow tells you about your specific investment structure. Capital expenditures (replacing a roof, HVAC system, or parking lot) are also excluded from NOI but reduce actual cash flow when they occur, so maintaining a capital expenditure reserve is good practice.
NOI expense ratio and cap rate benchmarks
| Metric | Range | What it signals |
|---|---|---|
| Expense ratio | Below 35% | Very lean - may be understating costs |
| Expense ratio | 35-50% | Normal for most stabilized rentals |
| Expense ratio | 50-60% | Higher than typical - review expense lines |
| Expense ratio | Above 60% | Likely operating at a loss or near breakeven |
| Cap rate | Below 4% | Premium market - low yield, lower perceived risk |
| Cap rate | 4-6% | Typical in major metros (NYC, LA, Seattle) |
| Cap rate | 6-8% | Typical in secondary markets |
| Cap rate | Above 8% | Tertiary markets or higher-risk assets |
| Vacancy rate | 0-5% | Very low - strong rental demand |
| Vacancy rate | 5-10% | Normal market condition |
| Vacancy rate | Above 10% | Weak demand or management issues |
General benchmarks used by real estate investors. Actual targets vary by property type, location, and market cycle.
Frequently asked questions
Does NOI include mortgage payments?
No. Mortgage principal and interest are specifically excluded from the NOI calculation. NOI measures the property's operating performance independent of financing. Subtracting annual debt service from NOI gives you pre-tax cash flow. This distinction matters because two investors can buy the identical property at the same price and achieve the same NOI while having very different cash flows, depending on their down payment and loan terms.
What is a good NOI for a rental property?
There is no universal "good" NOI because it depends on property price, market, and your investment goals. Instead, convert NOI into a cap rate (NOI divided by property value) to compare across properties. Most investors target a cap rate between 4% and 8%, with higher cap rates found in smaller or higher-risk markets and lower cap rates in premium urban markets. As a quick check, the 50% rule suggests that total operating expenses tend to equal about 50% of gross rents, leaving half as NOI before debt service.
What expenses are NOT included in NOI?
Four categories are excluded from operating expenses when computing NOI: (1) mortgage principal and interest payments, (2) income taxes, (3) depreciation and other non-cash accounting items, and (4) capital expenditures such as a new roof, HVAC replacement, or major renovation. These items affect cash flow and tax liability but are left out of NOI so it reflects only ongoing operational performance.
How does vacancy rate affect NOI?
Vacancy loss is subtracted from potential gross income before expenses are deducted, so every percentage point of vacancy directly reduces NOI. For example, on a property with $36,000 in annual gross rents, each 1% increase in vacancy reduces NOI by $360 before any expense effect. In practice, investors use historical vacancy data for a specific market, typically 5-8% for residential rentals in stable markets, to model realistic NOI projections.
How do I use NOI to value a property?
Divide NOI by the prevailing market cap rate to estimate property value: Value = NOI / Cap Rate. For instance, if a property produces $24,000 in annual NOI and the market cap rate for similar properties is 6%, the indicated value is $24,000 / 0.06 = $400,000. This income-approach valuation is used by commercial appraisers and is why lenders care deeply about your income and expense projections when underwriting a commercial real estate loan.
Is property management fee an operating expense for NOI?
Yes. Property management fees are a standard operating expense included when calculating NOI, even if you self-manage. Self-managing investors sometimes omit this line, which overstates NOI and inflates the implied cap rate. To compare properties fairly, always include a market-rate management fee (usually 8-12% of collected rent) whether or not you plan to self-manage.