What is NOI (Net Operating Income)?

Net operating income is a property's income after operating expenses but before the mortgage. It's the single most important number in rental real estate because it's what cap rate and a property's value are built on.

The formula

Effective gross income is your rent and other income after a vacancy allowance. Operating expenses are the recurring costs of running the property — but not the mortgage.

What's included vs. excluded

Excluding the mortgage is deliberate: it lets you compare two properties' earning power independent of how each is financed.

Worked example

A duplex rents for $3,000/mo = $36,000/yr. With 5% vacancy, effective gross income is $34,200. Operating expenses (taxes $4,000 + insurance $1,200 + management $2,736 + maintenance $1,800 + other $600) total $10,336.

Why NOI matters

• Cap rate = NOI ÷ price. It's how investors compare deals and how commercial property is valued.
• Value = NOI ÷ market cap rate. Raising NOI (higher rent or lower expenses) directly raises what the property is worth.
• Cash flow = NOI − debt service (your mortgage). NOI is the starting point.