What is Net Operating Income (NOI)?
Net Operating Income (NOI) is a rental property's annual gross rental income minus all operating expenses, before debt service and income taxes. NOI is the denominator of cap rate and the numerator of DSCR — it's the most-used number in rental underwriting.
NOI captures the operating reality of a rental: how much money the property generates after the costs of running it, but before financing decisions. Two investors looking at the same property compute the same NOI; they differ only on what they're willing to pay (which sets cap rate) and how they finance (which sets DSCR and cash-on-cash return).
Operating expenses include property taxes, insurance, property management (8-10% of rent typical), maintenance reserves (5-10%), capex reserves (5-10%), vacancy allowance (5-8%), HOA if applicable, utilities the landlord pays, and lawn/snow if applicable. NOI does NOT include mortgage interest, principal, depreciation, or income taxes.
A common error is using a pro-forma NOI (what the property should generate at full occupancy with stabilized rents) for buy decisions. Use trailing-12 actual NOI, then a stress-test pro-forma, and underwrite to the actual until you have control of the asset.
Annual rent $36,000. Vacancy 5% = $1,800. Taxes $3,600, insurance $1,200, PM $3,420 (10% of collected rent), maintenance $1,800, capex $1,800. Total OpEx $13,620. NOI = $36,000 − $1,800 − $13,620 = $20,580.
Concepts that connect.
Debt Service Coverage Ratio (DSCR) is the ratio of a property's annual net operating income to its annual debt service. A DSCR of 1.20 means the property generates 20% more income than it needs to cover the loan payment. Most DSCR lenders require 1.10-1.25 to underwrite.
Capitalization Rate (cap rate) is a property's annual NOI divided by its purchase price (or current market value), expressed as a percentage. It's an unlevered yield metric — the return an all-cash buyer would earn before financing.
Cash-on-cash return is annual pre-tax cash flow divided by the total cash the investor put into the deal (down payment + closing + rehab + reserves). Unlike cap rate, it accounts for financing. The most useful metric for comparing leveraged investments.
Gross rent yield is annual gross rent divided by the property's purchase price (or current value), expressed as a percentage. It ignores operating expenses and is used as a quick first-pass screening metric. A 6% gross yield is roughly the floor for a viable rental in most US markets in 2026.
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