Real Estate Investing

NOI: What Real Estate Investors Need to Know

November 25, 2023

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A Guide To NOI

While every investor doubtlessly has their own way of analyzing a deal, calculating and considering metrics is always a component. Net operating income, or NOI, is one of those metrics. It’s the quickest way to understand whether a particular property makes sense for your rental business or if you’re better off not pursuing the deal.  

So, what is NOI? How do you calculate it, and what do real estate investors need to know about it to make informed decisions about a new property investment? 

In this article, we’ll cover the NOI basics every investor needs to know as well as some tips for interpreting and applying this metric to your next deal.  

What is NOI? 

What is NOI, and how is it used in real estate? 

Net operating income, or NOI, is a gauge of an investment property’s potential profitability. It measures the income a property will generate after regularly, monthly expenses are subtracted, but it does not consider any variable expenses such as repairs or maintenance. It also excludes the impact of depreciation, property taxes, and interest (NOI is sometimes referred to as “earnings before interest and taxes”). 

Excluding these variable aspects helps you make an accurate baseline comparison between the NOIs of two or more properties based on only non-variable expenses. 

What is the NOI Formula 

The NOI formula is as follows: 

𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝑁𝑂𝐼)= 𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝐺𝑂𝐼) − 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠

Let’s break this formula down into its individual components. 

Gross Operating Income 

The first half of the formula is Gross Operating Income (GOI). This is the total income you receive (or expect to receive) from a rental property, minus expected vacancy losses.  

𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝐺𝑂𝐼)= 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑅𝑒𝑛𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 (𝑃𝑅𝐼) − 𝑉𝑎𝑐𝑎𝑛𝑐𝑦 𝐿𝑜𝑠𝑠

If you’re using the NOI formula to calculate projected NOI for a property you’re considering buying, you should first find your Potential Rental Income (PRI), which is the total revenue you’ll generate assuming your property is fully occupied year-round and that your tenants don’t default in any rent payments.  

Here is a list of the various types of income that should be included in your potential rental income: 

  • Rents 
  • Nonrefundable deposits (e.g., pet deposits) 
  • Pet rent 
  • Parking fees 
  • Utilities
  • Any other payments you receive for the use or occupation of a property 

Next, subtract vacancy loss—the amount of rental income you’d expect to lose when your property is vacant throughout the year. This can be done by estimating how many weeks or months of the year you’d expect to find your property vacant, then multiplying to determine how much income you’d lose at the rate you intend to rent the unit for. 

Operating Expenses 

The second half of the NOI formula is the sum of all your operating expenses. These are the non-variable, regular monthly expenses you expect to incur from a property, like insurance and property management fees.  

The IRS defines “operating expenses” very strictly for tax deduction purposes. According to the IRS, operating expenses are: 

  1. Ordinary and necessary – Common expenditures that help your rental business in some way. 
  1. Current – It benefits your business for less than a year (e.g., a roof repair is not an operating expense because it lasts for more than a year). 
  1. Directly related to rental activity – It can’t be for your personal use. 
  1. Reasonable in amount—While there’s no set maximum amount, the expense should be reasonable for the type of expense it is. 

Based on these criteria, operating expenses include: 

  • Property management fees (including software fees) 
  • Advertising and listing fees 
  • Landlord insurance premiums 
  • Mortgage interest payments 
  • Cleaning and maintenance fees 
  • Supplies 
  • Travel costs if you travel to your office/properties 
  • Legal fees 
  • HOA fees 
  • Utilities you cover 

The following expenses are not operating expenses: 

  • Entertainment expenses 
  • Government fines 
  • Fees incurred from illegal activity 
  • Lobbying or political contributions 
  • Capital expenses (e.g., major renovations, construction of new dwelling units, etc.) 
  • Real estate examination fees 
  • Licensing fees 
  • Federal income taxes 
  • Certain interest payments 

If you can’t get a close estimate for your operating expenses or simply want to speed up the calculation, a good rule of thumb is that operating expenses are around one third or 33% of your GOI. 

Using the Formula 

After you’ve found both your Gross Operating Income and your operating expenses, using the formula is easy: Simply multiply your monthly totals by 12 to get the annual counterparts, then subtract your yearly operating expenses from your GOI to find the Annual Net Operating Income for your property. 

Using a NOI Calculator 

If you don’t want or have time to do the math, another option is to use a NOI calculator. You might be evaluating hundreds of properties with only a few days to narrow down your search. When speed is the name of the game, an NOI calculator can save you hours of time.  

Landlord Guru’s NOI calculator allows users to input their monthly rent, other income, insurance, utilities, and other costs and then outputs an approximate NOI. 

From Calculating NOI to Interpreting It 

After calculating NOI, what do you do with the result? 

As is often the case in deal analysis, the result of your NOI calculation only makes sense in comparison to other properties you might be interested in buying. There’s no such thing as a “good” NOI, but only a good one for your particular business in a specific market compared to other investment options. 

You can think of NOI as a broad, macro assessment of cash flow, or how much revenue you’ll pocket at the end of the day. It’s a general measure of your property’s return, or the amount of money you’ll make after paying all the expenses required to maintain the property itself. 

Keep in mind that NOI is not a perfect metric. It is likely to overestimate your revenue, as there are bound to be unexpected costs like evictions or ones that vary considerably over the year, like repairs. NOI also excludes larger capital expenses that you’ll most certainly incur over time, such as roof repairs, kitchen renovations, or other large-scale projects. As assurance against these weaknesses, remember to use NOI in coordination with other metrics, such as ROI, capitalization rate, and gross rent multiplier. You should never make a real estate decision based on one metric or calculation in isolation. 

NOI Example 

In this section, let’s walk through a real-life example of how to calculate NOI for a property. 

Let’s say you’re evaluating a duplex property in Cincinnati, Ohio. Let’s assume for this example that you plan to rent out both units and self-manage them with the help of free software to reduce management costs. Here are your estimated income and expenses for this property: 

Income (per unit per month)  Expenses (per month) 
Rent: $1,335 Parking fee: $15 Water, sewer, and trash: $35   Landlord insurance: $90 Property management: $0 Mortgage interest payments: $400 Cleaning and maintenance: $350 HOA fees: $200 Water and sewer: $85 

Totaling the above, for two units over the course of a year, we get: 

Income total (per year)  Expenses total (per year) 
$33,240  $13,500 

Now we can start working on the NOI calculation. Here’s our formula once again: 

𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝑁𝑂𝐼)=𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝐺𝑂𝐼)−𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠

We’ll start with the first half of the formula, the gross operating income. Here’s how we calculate it using this duplex’s information, assuming an expected vacancy of approximately one month per year for each unit, or $2,770 in lost rent. 

𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝐺𝑂𝐼)=𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑅𝑒𝑛𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒−𝑉𝑎𝑐𝑎𝑛𝑐𝑦 𝐿𝑜𝑠𝑠

𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝐺𝑂𝐼)=$33,240−$2,770

𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝐺𝑂𝐼)=$30,470

The bottom half of the formula, the operating expenses, is simply the annual sum we calculated earlier, $13,500. Now we can complete the NOI formula: 

𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝑁𝑂𝐼)=𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝐺𝑂𝐼)−𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝑁𝑂𝐼)=$30,470−$13,500

𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝑁𝑂𝐼)=$16,970

Your Net Operating Income (NOI) for this duplex would be approximately $16,970. 


NOI is just one of many quick calculations real estate investors make all the time when analyzing a deal. You can use this formula to make accurate comparisons between any two properties you’re interested in, as long as you account for its shortcomings and consider multiple factors in your analyses. 

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