If you are evaluating an income property, Net Operating Income (NOI) is the number everything else hangs on. Get it wrong, and every calculation that follows — cap rate, value, cash flow — is wrong too.
What NOI is
NOI is the property's rental income minus its operating expenses. It is what the property earns from operations before debt service and before capital expenditures.
The expenses that actually matter
Operating expenses typically include property taxes, insurance, utilities (where owner-paid), maintenance, management, and a vacancy allowance. What it does not include is your mortgage payment — that is debt service, not an operating expense.
Build it from real numbers
The most common mistake is underwriting to projected rent and understated expenses. Use the actual rent roll. Confirm what the owner really pays for. Add a realistic vacancy factor. Only then do you have an NOI you can trust.
Cap rate is NOI divided by price
Once you have a credible NOI, cap rate is straightforward: NOI divided by purchase price. It is a useful comparison tool across properties — but only when every NOI is built the same way. A cap rate built on optimistic assumptions is not comparable to one built on real ones.
NOI does not capture everything
NOI does not account for capital expenditures — a new roof, a boiler replacement, unit renovations. Those are real costs over time, and an investor who ignores them overstates the property's true return.
The takeaway
NOI is a tool, not a verdict. Build it honestly, use it consistently, and it becomes one of the most useful numbers in real estate investing.