How to Calculate NOI on a Rental Property

Last reviewed April 2026

Net Operating Income (NOI) is one of those terms that gets thrown around in every conversation about rental property investing, but I've found a lot of newer investors don't really understand what's in it and what isn't. That matters, because NOI is the foundation for cap rate, DSCR, and almost every other valuation metric used in commercial real estate. Let's walk through how to actually calculate it, with a real example, and look at the mistakes that trip people up.

The Definition

NOI is annual gross income minus annual operating expenses, with one critical exclusion: mortgage payments are not part of operating expenses. NOI looks at what the property earns on its own, ignoring how it was financed. That's a deliberate design choice. By excluding mortgage payments, NOI lets you compare two properties side by side without worrying about who has what loan terms.

The formula is simple: NOI = Gross Income minus Operating Expenses. The hard part is making sure you have the right numbers in each bucket.

What Counts as Gross Income

Gross income is everything the property brings in over a year. For a single-family rental, that's mostly rent, but it can include other things too:

• Monthly rent (the big one)
• Pet rent (usually $25 to $50 per month per pet)
• Parking fees if you have a garage or off-street parking that's separately charged
• Storage unit rent if there's a basement or shed you rent out
• Laundry income if you have coin-op or smart-machine laundry
• Late fees, lease application fees, and other admin charges
• Utility reimbursements if the tenant pays you back for water, gas, or trash

For a $1,800 a month rental with $50 in pet rent, gross monthly income is $1,850, and gross annual income is $22,200. That's where you start.

What Counts as Operating Expenses

This is where most beginners go wrong. Operating expenses include everything required to keep the property running and rentable. They do not include the mortgage. They also don't include capital improvements like a new roof or a kitchen remodel (those are added to your basis, not expensed). Here's the standard list:

• Property taxes. Pull these from the county assessor. They vary wildly: 0.7 percent in Tennessee, 2.5 to 3 percent in Texas and parts of Illinois.
• Insurance. Landlord policies typically run $800 to $2,500 a year depending on the state, the value, and the wind/flood/wildfire exposure.
• Vacancy reserve. Most investors budget 5 to 8 percent of gross rents. I use 5 percent in stable markets and 8 percent in transient ones.
• Repairs and maintenance. Budget 5 to 10 percent of gross rents for routine repairs (plumbing leaks, appliance fixes, paint touch-ups). Older properties need the higher end.
• CapEx reserve. Set aside 5 to 15 percent for the big-ticket items that wear out over time: roof, HVAC, water heater, flooring, exterior paint. Newer properties can use 5 percent; 1970s ranches need 15 percent.
• Property management. Standard rate is 8 to 10 percent of collected rents if you hire it out. If you self-manage, set this to 0 percent but be honest about your time.
• Utilities you cover. Many SFR landlords pass all utilities to the tenant. If you cover any, include it here.
• HOA fees. If the property is in an HOA, this is annual.
• Lawn care, snow removal, pest control. Easy to forget but can add up to $1,000 to $2,000 a year.

A Worked Example

Let's run NOI on a $200,000 single-family rental. Monthly rent is $1,800, plus $50 in pet rent for one tenant with a dog. Annual gross income is $22,200. Now the expenses:

NOI is $22,200 minus $11,278, or $10,922. That's the property's net operating income. Cap rate is $10,922 divided by $200,000, or 5.46 percent. Whether that's a good cap rate depends entirely on current mortgage rates, which I covered in What Is a Good Cap Rate for Rental Property?.

The Mistakes I See Most Often

Three things newer investors get wrong on NOI more than anything else:

Including the mortgage. This is the cardinal sin. NOI excludes mortgage payments by definition. If you subtract the mortgage from gross income, you get pre-tax cash flow, not NOI. They are different numbers and they answer different questions.

Forgetting CapEx. A lot of people only budget for repairs and skip CapEx because nothing is broken right now. Then five years in, the roof goes and they have no reserves. CapEx is real money that you should be setting aside every month, not a future problem.

Lowballing vacancy. "My property will always be rented" is not a financial assumption, it's a hope. Even great landlords with great properties have a tenant move out every 2 to 5 years and need a month or two to turn the unit. Budget at least 5 percent, and don't get mad at me when you need it.

Why NOI Matters Beyond Cap Rate

NOI shows up in three places that matter for any rental investor. First, it's the numerator of the cap rate formula. Second, it's the numerator of DSCR, which determines whether the property qualifies for a loan. Third, NOI is what commercial appraisers use to value income-producing properties (they capitalize it at a market cap rate to derive value). So if you can grow NOI by raising rents or cutting expenses, you're growing the asset's value at the same time.

The fastest way to compute NOI on any property you're evaluating is to plug the numbers into the LandlordCalc rental property calculator. It walks you through gross income and each expense category, computes NOI automatically, and then uses that NOI to derive cap rate, DSCR, cash flow, and the rest of the metrics in one screen.

Bottom line: NOI is just income minus operating expenses, but the operating expense bucket has to be honest and complete. Skip CapEx, lowball vacancy, or forget the lawn care budget, and your NOI will look great on paper and disappointing in reality.

Frequently Asked Questions

Is NOI the same as cash flow?

No. NOI is gross income minus operating expenses, but it excludes the mortgage payment. Cash flow is NOI minus mortgage debt service. So a property with positive NOI can still have negative cash flow if the mortgage payment is large enough.

Does NOI include property taxes?

Yes. Property taxes are an operating expense and are deducted from gross income to get NOI.

Does NOI include depreciation?

No. Depreciation is a tax accounting concept, not a real cash expense. NOI is a cash-flow concept and excludes depreciation entirely.

How do you increase NOI on a rental property?

Two ways: raise gross income (rent increases, adding pet rent, charging for parking or storage, reducing vacancy) or cut operating expenses (renegotiate insurance, switch property managers, reduce maintenance through better tenant screening). Even small NOI improvements compound into meaningful value increases over time.

What's a healthy expense ratio for a single-family rental?

The 50% Rule says expenses tend to run around 50% of gross income over time, but for a well-managed SFR I typically see 35% to 50%. If your expense ratio is above 60%, the deal is probably too tight to work.