NOI — net operating income — is a property's effective rental income minus its operating expenses: taxes, insurance, maintenance, management, utilities the owner pays, and the other costs of running the building. NOI deliberately excludes the mortgage payment and capital reserves for major systems; it measures the property's own earnings, which is why lenders and buyers underwrite from it and why cap rate is built on it.
The formula / structureNOI = Effective Rental Income − Operating Expenses
NOI: a worked example
Worked example. A duplex collects $2,400/mo gross. Vacancy at 5% leaves effective income of $2,280/mo. Operating expenses — taxes $410, insurance $160, maintenance $180, management $205, water $90 — total $1,045. NOI = $2,280 − $1,045 = $1,235/mo, or $14,820/yr.
What affects NOI
- Rent level and vacancy
- Property taxes (a common post-purchase surprise when assessments reset)
- Insurance pricing
- Maintenance reality and management cost
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