INVESTING FUNDAMENTALS

How to Calculate NOI on a Rental Property (With Examples)

Updated March 2026 · 10 min read

Net Operating Income — NOI — is the foundation metric of rental property investing. Every other number you care about (cap rate, DSCR, property valuation) flows from NOI. Get this wrong and every decision downstream is flawed. Get it right and you have a clear picture of whether a property actually makes money.

The NOI Formula

Critical: NOI does not include mortgage payments, capital expenditures, or depreciation. This is intentional — NOI measures the property's earning power independent of how you financed it. Two investors can buy the same property with different loan structures, but the property's NOI is identical.

Step-by-Step Calculation

Step 1: Calculate Gross Rental Income

Start with the total rent you'd collect if the property were 100% occupied for the full year. If you have a single-family renting for $1,200/month, that's $14,400 in gross annual rental income. For a duplex with units at $900 and $1,000, it's $22,800.

Include any other property income: laundry machines, parking fees, pet rent, storage unit fees. All of these go into gross income.

Step 2: Subtract Vacancy Allowance

No property is occupied 365 days a year, every year. The industry standard is to subtract 5-10% for vacancy and credit loss. In tight markets (vacancy under 5%), use 5%. In softer markets (Memphis, Detroit, Cleveland), use 7-10%. This accounts for turnover time between tenants and the occasional missed rent payment.

Step 3: Subtract Operating Expenses

Operating expenses include everything it costs to run the property on an ongoing basis:

Property taxes, property insurance, property management fees (typically 8-10% of collected rent), maintenance and repairs, landscaping, pest control, HOA fees, landlord-paid utilities, advertising costs for vacancies, and legal/accounting fees. If you self-manage, you should still include a management fee in your analysis — your time has value, and it makes the analysis comparable to other investments.

Worked Example: Toledo Rental Property

5 Common NOI Mistakes That Cost Investors Money

1. Forgetting vacancy. Listing agents and sellers present properties at 100% occupancy. In the real world, you'll have turnover, and each turnover costs 1-2 months of rent (vacancy + make-ready costs). Always deduct at least 5%.

2. Including mortgage payments. NOI is before debt service, by definition. If someone tells you their property's NOI after subtracting the mortgage, they're actually describing cash flow — a completely different metric.

3. Using pro forma rents instead of actual rents. A seller might tell you a property "could rent for $1,400." Maybe. But what does it actually rent for today? Use current market rents verified through comparable listings, not aspirational numbers.

4. Ignoring management costs when self-managing. You might plan to self-manage, but what happens when you get a second job, move away, or just burn out? Including an 8-10% management line item keeps your analysis honest and comparable.

5. Underestimating maintenance. The general rule is 1% of property value per year for maintenance, or 10% of gross rent — whichever is higher. Older properties (pre-1980) should budget 15% of rent. One furnace replacement ($4,000-6,000) can wipe out most of a year's cash flow.

How NOI Connects to Everything Else

NOI is the input to virtually every real estate metric:

Cap Rate = NOI ÷ Property Value. Tells you the unlevered yield. (Learn more)

DSCR = NOI ÷ Annual Debt Service. Tells you if the property can cover its loan payments. Lenders require 1.20-1.25 minimum. (Learn more)

Property Valuation = NOI ÷ Market Cap Rate. If similar properties trade at 7% cap rates and your NOI is $10,000, your property is worth approximately $142,857.

Cash Flow = NOI − Annual Debt Service. The actual money left in your pocket after paying the mortgage.

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