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How to calculate net operating income (NOI) on a rental property

By Spruce Sheets · Updated November 14, 2026 · 5 min read

Net operating income, or NOI, is the earning power of a rental before you consider how it is financed. It is the figure behind cap rate and DSCR, and it is the bridge between rent and cash flow. This guide isolates NOI: the formula, a worked example, what belongs in the expense line, and why two honest people can quote two different NOI figures for the same building.

General information, not investment, appraisal or tax advice. The example is made up. NOI is a pre-financing, pre-tax measure of operations; it is not taxable income and it is not cash in your pocket.

The NOI formula

Effective rental income − operating expenses = NOI

• Effective rental income (effective gross income) starts with scheduled rent, subtracts a vacancy and credit-loss allowance, and adds other income you actually collect, such as parking, pet rent or laundry.
• Operating expenses are the costs of running the property: property tax, insurance, repairs and maintenance, owner-paid utilities, HOA dues, property management, landscaping, and similar day-to-day items.
• NOI is what is left before debt service. Annual NOI is the monthly figure times 12, if the year is typical.

Two things that are not operating expenses for this purpose:

• The loan payment (principal and interest). Subtract it after NOI to get cash flow.
• Depreciation, which is a non-cash tax deduction, not a bill you pay.

Income taxes are also left out. NOI describes the property, not your tax return.

A worked example

A made-up single-family rental rents for $2,300 a month. Vacancy is allowed at 5%. The owner pays water, a modest HOA fee and an 8% management fee; taxes and insurance are as shown. Figures are monthly.

Line	Amount
Scheduled rent	$2,300
Vacancy allowance (5%)	$115.00
Effective income	$2,185.00
Property tax	$300.00
Insurance	$130.00
Repairs and maintenance	$115.00
Owner-paid utilities	$85.00
HOA dues	$45.00
Management (8% of effective income)	$174.80
Operating expenses	$849.80
NOI	$1,335.20
Annual NOI	$16,022.40

If this property were bought for $320,000, the cap rate using this NOI would be $16,022.40 ÷ $320,000 = 5.01%. The loan, if any, has not entered the calculation.

The capex-reserve question

The example above does not subtract a capital-expense reserve. Roofs, HVAC and similar replacements are real, but they do not arrive in equal monthly bills, and not every worksheet treats them the same way:

• Investor underwriting often deducts a reserve (here, 5% of rent would be $115.00 a month) before quoting NOI, so the figure is harder to flatter. NOI would then be $1,220.20 a month, or $14,642.40 a year.
• Some appraisals and lender forms calculate NOI without that reserve, and handle capital items elsewhere.

Both can be honest. They are not interchangeable. If you use NOI for cap rate or DSCR, label whether a reserve is in the expense total, and only compare properties (or offers) on the same definition.

Repairs to keep the property in ordinary condition belong in operating expenses either way. A full roof replacement is generally a capital item, not a monthly repair; see repairs vs improvements.

From NOI to cash flow

Once you have NOI, cash flow is one more subtraction: monthly NOI minus the monthly loan payment. Using the first definition above (no capex reserve), NOI is $1,335.20. If the loan payment were $1,200.00, cash flow would be $135.20 a month. If you instead use the more conservative NOI of $1,220.20, cash flow on the same payment would be $20.20. Same property, same loan; the reserve is the only difference.

That is also why a property can have a healthy NOI and still be a poor cash-flow deal: a large loan or a high rate can absorb most of the NOI. NOI tells you what the property earns. The loan tells you how much of that earnings you get to keep as cash.

How NOI is used

• Cap rate = annual NOI ÷ price (or value). Same NOI, higher price, lower cap rate.
• DSCR = NOI ÷ debt service. Lenders may recompute NOI with their own vacancy and expense assumptions, so their ratio may differ from yours.
• Cash flow = NOI − loan payment. A solid NOI can still produce thin or negative cash flow if the loan is large or the rate is high.
• Comparing offers. Because financing is left out, NOI lets you compare two properties, or two rents on the same property, without mixing in anyone's down payment.

NOI is not a complete return measure. It leaves out loan paydown, appreciation and taxes, and it is only as good as the vacancy and expense assumptions you put in.

Common mistakes

• Using asking rent with no vacancy allowance.
• Leaving out owner-paid utilities, HOA dues or a realistic repair budget.
• Subtracting the mortgage payment and then calling the result NOI. That result is cash flow (if you also treated the figures consistently).
• Subtracting depreciation and mixing a tax figure into an operating measure.
• Comparing two cap rates that were built on different NOI definitions, one with a capex reserve and one without.

Doing it in a spreadsheet

Put rent, vacancy and each operating expense in their own input cells, add them once, and you have NOI. From there, cap rate, DSCR and cash flow are short formulas. The free Spruce Sheets Rental Property Cash Flow Calculator produces all four in Excel or Google Sheets. The Rental Property Analysis Calculator does the same for up to five deals and lets you stress-test rent and expenses.

The example is made up. This guide is not investment, appraisal, lending or tax advice. Say which NOI definition you are using before you compare deals.

Frequently asked questions

What is the formula for NOI on a rental property?

Net operating income is effective rental income minus operating expenses. Effective income is rent after a vacancy allowance, plus other rental income you actually collect. Operating expenses are the costs of running the property, not the loan payment and not depreciation.

Is the mortgage payment included in NOI?

No. Debt service sits below NOI. That is what makes NOI useful for cap rate and for comparing properties with different financing. Cash flow is NOI minus the loan payment.

Should a capex reserve be in NOI?

Practices differ. Many investors subtract a capital-expense reserve before they quote NOI, so the figure is conservative. Some appraisals and lender worksheets calculate NOI without that reserve. Say which definition you are using, and do not compare two cap rates that were built on different NOI definitions.

Keep reading

• How to calculate rental property cash flow, step by step
• How to calculate cap rate on a rental property, with examples
• How to calculate DSCR for a rental loan, with a worked example