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

Net Operating Income (NOI) is a key financial metric investors use to measure a property's profitability. NOI represents the property’s total income after operating expenses—but before mortgage payments, taxes, or capital expenditures. It is the foundation for calculating cap rates, valuing commercial property, and estimating investment performance.

How Net Operating Income (NOI) Works

NOI focuses only on income and expenses tied to operating the property. It removes financing and tax variables so investors can evaluate properties on an apples-to-apples basis.

  • Formula: NOI = Gross Rental Income – Operating Expenses
  • Includes: repairs, maintenance, management, utilities (if landlord-paid), insurance
  • Excludes: mortgage payments, depreciation, income taxes, capital improvements
  • Used to calculate property value, cap rate, and investment viability

Example of NOI

A duplex produces $48,000 in annual rental income. Operating expenses total $18,000 for the year.

NOI = $48,000 – $18,000 = $30,000

This $30,000 NOI is used to estimate cap rate, determine property value, and compare investment opportunities.

NOI vs. Other Investment Metrics

  • NOI: Income after operating expenses
  • Gross Income: Income before expenses
  • Cap Rate: NOI compared to property value
  • Cash Flow: Income after loan payments and taxes

NOI is the most widely used measure for comparing commercial real estate performance.

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