Metric Explained
NOI in real estate: the number cap rate and DSCR are built on.
Net operating income (NOI) measures what a property earns on its own, before financing. Here is the formula, what counts (and what doesn't), and how NOI drives the two metrics lenders and investors rely on most.
- NOI = effective gross income − operating expenses
- Excludes mortgage, capital expenditures, depreciation, and income taxes
- Drives cap rate (NOI ÷ price) and DSCR (NOI ÷ debt service)
Why financing is left out on purpose
NOI strips out your loan so you can compare properties on equal footing, no matter how each is financed. That is exactly why cap rate and lender underwriting start from NOI.
Conservative expenses beat optimistic rent
Most NOI errors come from understating expenses — forgetting management, reserves, or a realistic vacancy rate. Model them honestly and your cap rate and DSCR will hold up under scrutiny.
What is NOI (net operating income)?
Net operating income (NOI) is the income a property produces after operating expenses but before debt service, income taxes, depreciation, and capital expenditures. It answers a single question: how much does this property earn on its own, regardless of how you finance it? Because it strips out financing, NOI lets you compare two properties on equal footing and is the foundation for cap rate and most lender underwriting.
The NOI formula
NOI = Effective Gross Income − Operating Expenses
Effective gross income is your gross potential rent plus other income (laundry, parking, fees) minus a vacancy and credit-loss allowance. Operating expenses are the costs of running the property: property taxes, insurance, property management, repairs and maintenance, utilities you pay, landscaping, and reserves for routine upkeep.
What NOI does NOT include
This is where beginners trip up. NOI deliberately excludes:
Mortgage principal and interest — that is debt service, handled after NOI. Capital expenditures — big-ticket replacements like a roof or HVAC. Depreciation — a non-cash tax item. Income taxes. Leaving these out is intentional: it keeps NOI a clean, financing-neutral measure of the asset itself.
Why NOI matters: cap rate and DSCR
Two of the most important metrics in real estate are built directly on NOI:
Cap rate = NOI ÷ purchase price. It expresses the unleveraged yield and lets you compare a property against its market.
DSCR = NOI ÷ annual debt service. Lenders use it to confirm the property covers its own loan; most want at least 1.20–1.25.
Get NOI wrong and both numbers are wrong — which is why conservative expense modeling matters more than optimistic rent.
NOI vs cash flow
NOI is not your take-home. Cash flow = NOI − debt service − capital expenditures. A property can show healthy NOI and still bleed cash once the mortgage and a new roof are accounted for. Use NOI to evaluate the asset; use cash flow to evaluate your actual return.
Calculate NOI on a real deal
Enter price, rent, taxes, insurance, and expenses into the property analyzer and it computes NOI, cap rate, cash-on-cash, and DSCR in one pass — with a BUY / PASS / CONDITIONAL verdict. New to the metrics? Start with the real estate investing guide.