NOI in real estate investing

Rental properties not only generate ongoing income, but you can predict that income before you buy a property. In order to do so, however, you need to know how to run the numbers.

Numbers such as net operating income or NOI.

While it may sound complicated, NOI in real estate investing is actually a simple calculation. As in, back-of-the-napkin simple.

Before investing in rental properties however, make sure you understand the role NOI plays in real estate cash flow.


What Is NOI in Real Estate?

First of all, a quick refresher on accounting terms: gross income means “total income before expenses,” while net income means “income left after expenses.”

So, net operating income refers to landlords’ take-home income after most expenses. I say “most” because NOI does not include every single expense — more on that shortly.

A property’s net income reveals what kind of profit and return you can expect to earn from it. Important information to know, especially before you shell out thousands of dollars on a down payment for a rental property.

As a final note, both gross and net operating income are calculated as annual numbers.


Formula for Net Operating Income

The formula for NOI in real estate isn’t exactly rocket science:

Net Operating Income = Gross Operating Income – Operating Expenses

Like I said, you can calculate the net operating income formula on the back of a cocktail napkin. After your third old fashioned.

The real meat of calculating NOI, however, lies in accurately estimating each expense.


Expenses Included in Real Estate NOI

To calculate NOI in real estate, you need to forecast all operating expenses. Including expenses that many novice real estate investors forget about entirely.

Make sure you include all of the following expenses when you calculate real estate NOI and cash flow profitability.


Vacancy Rate

No property has a 100% occupancy rate. You’ll have turnovers and vacancies for every property you buy.

That said, some properties and neighborhoods boast much lower vacancy rates than others. In markets with plenty of demand, landlords receive dozens of rental applications within a few days of advertising vacant units. In areas with less demand for housing, rental applications may only trickle in over weeks of advertising.

As a general rule, plan on at least a 4% vacancy rate, which represents around one month vacancy every two years.


Maintenance & Repairs

Likewise, all properties need repairs and maintenance, and more often than new landlords guess.

From repainting units in between tenants (which usually costs several thousand dollars) to new carpets, from furnace repairs to new roofs, you will have plenty of these expenses. While some investors don’t count capital expenditures (CapEx) as repairs in NOI, I do. A $5,000 new roof certain impacts your bottom line, and you can predict these capital improvement costs as a long-term average.

I generally set aside 10-15% of the rent each month for these repairs.


Property Management Costs

Rental properties are not a completely passive source of income. They require work to manage, from screening tenants to fielding 3am phone calls about broken toilets and beyond.

You can do this work yourself of course, or you can hire a property manager and outsource it. Either way, you need to account for these costs. If you manage the property yourself at first, it’s still a labor cost, so make sure you compare apples to apples by including labor costs with rental properties when you compare them to other investments like ETFs or crowdfunded real estate investments.

Expect average property management fees to run 7-10% for collecting lease payments and ongoing management, plus one month’s rent for each new tenant placed. That comes to roughly 10-14% of the rent, depending on the fees you pay and the property’s turnover rate.


Property Taxes

While property tax rates vary by county, there’s not a single county in the US that doesn’t charge property taxes.

And no, you can’t just use the current property tax bill at the time you buy a property. You need to calculate the increased property tax bill, based on the local tax rate and the purchase price for the property. Because the local tax assessment office will certainly bump up the assessed value based on what you pay.



Landlords must carry property insurance just like homeowners. The only real difference is that landlord insurance policies cover only the building, and don’t include the personal possessions inside. (Try Sure as a good landlord insurance provider.)

Some landlords also keep rent default insurance, which kicks in and pays the rent if the tenant stops paying. These policies aren’t expensive, and they provide great peace of mind.


Accounting, Legal, Marketing, and Miscellaneous

Rental property expenses don’t end with the bills above. Landlords periodically need to pay for legal services such as hiring an attorney for the eviction process, or buying a state-specific lease agreement, or asset protection measures.

Then there’s the travel to and from rental properties. The bookkeeping, the higher accounting bill for your more complicated tax return. The marketing expenses to fill vacant units quickly. And so on and so forth.

Budget for these expenses, setting aside 2-4% of the rent for them.

(article continues below)

Ditch Your Day Job: How to Retire Early with Rental Income (Free 8-Video Course)

..What’s Not Included in NOI?

Not all expenses are included in NOI for real estate. When you run your numbers for net operating income, don’t include the following expenses.

Debt Service (Mortgage)

Net operating income — and its sister calculation cap rates — are intended to be specific to the property, not to the buyer. One buyer could pay in cash, the other could get a rental property loan for 80% of the purchase price, and that would affect each buyer’s cash flow. But your financing decisions don’t affect the property’s intrinsic NOI.

Don’t include your monthly mortgage payment when running the numbers for NOI. 

Income Taxes

Similarly, income taxes are unique to you, not the property. One landlord might be taxed at the 10% federal income tax rate, while another pays 24% in federal income taxes. Which says nothing of state and local income taxes, depending on where the landlord lives. 

Note that landlords pay income taxes on net rental income at their normal income tax rate. They can, however, take rental property tax deductions without having to itemize their personal deductions. Rental property tax deductions are “above the line” expenses and deductions. 


As a more unique deduction, landlords can deduct the cost of the building and any capital improvements to it. However, they must spread these deductions over 27.5 years, using depreciation. 

It can get confusing, so read up on how rental property depreciation works if you’re not familiar with it. 

Tenant Improvements

If tenants improve your property, that doesn’t count toward expenses included in NOI.

But this is much more common in the commercial property space, and rarely affects residential landlords.

Example Calculation for Net Operating Income

Ready with that cocktail napkin?

You buy a property for $100,000, that rents for $1,200. Gross operating income is therefore $14,400 ($1,200 x 12 months). 

The monthly expenses break down as follows:

  • Vacancy rate: $48 (4%) 

  • Maintenance & repairs: $144 (12% of the rent)

  • Property management: $144 (12% of the rent)

  • Property taxes: $150

  • Insurance: $80

  • Accounting, legal, miscellaneous: $36 (3% of the rent)

Total Monthly Costs: $602

Total Annual Costs: $7,224

Net Operating Income: $7,176 

Note that these numbers are in line with industry averages — non-mortgage expenses typically add up to around half the rent. This trend even has a not-so-original name: the 50% Rule. 

In real life, you don’t even have to use a cocktail napkin to run these numbers. Use our free rental property calculator to run these and other related numbers!

Read cities with declining home prices.

Read california rent control.

(article continues below)

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

NOI & Cap Rates

Real estate investors frequently talk about capitalization rates (cap rates) when comparing rental properties. Cap rates use NOI in their calculation. 

Investors use cap rates as one way to measure return on investment (ROI) for rental properties. The formula looks like this:

Capitalization Rate = NOI / Purchase Price

In the example above, the cap rate is 7.18: $7,176 / $100,000 = 7.18. Which means that if you bought the property in cash, you could expect an annual return of roughly 7.18%. Note that cap rates only measure income yield, not appreciation or capital gains. 

Of course, if you took out a rental property loan, it would change your cash-on-cash return on the property. Imagine you put down 20% ($20,000), and after accounting for the mortgage payment, you were left with $2,000 in net rental income each year. You’d earn a 10% cash-on-cash return: $2,000 / $20,000.

How to Improve NOI in Real Estate

Landlords do have a degree of control over NOI for each investment property.

One way to improve your NOI and rate of return is by raising rents. With higher rental rates, you boost the property’s income and returns.

You can also look for ways to add income streams to your property, such as charging parking fees or installing vending machines or laundry machines in multifamily properties.

Also come at the problem from the other direction: reducing your operating costs. How can you reduce maintenance and repair costs? Reduce turnovers and vacancy losses? Can you negotiate lower property management fees?

Property owners can and should look for ways to optimize their income properties by maximizing monthly rents and other receipts, while minimizing expenses like property vacancies.

Final Thoughts

Net operating income is merely one of many measurements you should understand as a real estate investor. Cap rates represent another, and cash-on-cash return another. 

Fortunately, they’re all interrelated, and none require a math degree. 

As another practical application of these figures, check out some of the best cities for cap rates in the US, and another list of best cities for real estate investing by GRM

Once you learn how to predict returns on real estate investments, you’ll never make a bad investment again.

Related Article Read : how to buy your first rental property with no money?

Read Can an llc get a conventional mortgage?


What calculations do you run before investing in rental properties?



More Real Estate Investing Reads:

About the Author

G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.

FREE Webinar: Open $250K in Credit Lines for Investing

On Wed. 3/23/22 at 2pm & 8pm EST, Deni & Brian are hosting Fund&Grow for a free webinar to show you how to open up to $250,000 in unsecured business credit lines for real estate investing.

Free Background Check

Run a FREE housing & identity check!

Credit, criminal, eviction reports also available.

Want to create passive income?


We’ll email a series of videos in our free course,

to help you start earning income from rentals.

[mc4wp_form id=”501″]

Privacy Policy: Your info will never be shared or sold to a 3rd party. Even if Dr. Evil offers us 1 million dollars 🙂

Rental ROI Ebook

Want to earn more from your rentals?


Download our free Ultimate Guide to Higher ROI and be dazzled by the charming wit, disarming frogs and invaluable tips for higher profits and less work.


[mc4wp_form id=”501″]

Free Mini-Course: Passive Income from 2-4 Unit Multifamilies

Free Mini-Course: Passive Income from 2-4 Unit Multifamilies


Ready to build passive income from small multifamily properties?

Over the next week, we'll email you a free series of videos, so enter your best email and let's get started!

You're in! Check your email to confirm, and you can email us directly at [email protected] with any questions :-)

Free Webinar: Earn 15-50% on Passive Real Estate Syndications

LIVE masterclass on Tues. 10/25 @ 8pm EST

Your seat is reserved! Check your email to confirm.

Inside a group real estate investment

Here's a quick video breakdown of a past group investment — and how it's performed since our Co-Investing Club invested in it in early 2023.

You got it! Check your email for the link, and some other fun freebies.

Ready to Build Passive Income?

Ready to Build Passive Income?


We'll email you the course videos over the next week, so enter your best email!

You're in! Check your email to confirm.

Ditch Your Day Job: Free 8-Video Course


Our brand new course on how to reach financial independence and retire early (FIRE) with rental properties is open for one week from Oct. 23-30!

You're in! Check your email for the link, or click here for the 1st video!