Net operating income
By Jude Wallis
Net operating income, or NOI, is rental income less a vacancy allowance and less operating expenses. It is measured before mortgage payments, depreciation and income tax.
Keep reading
NOI is deliberately blind to how a building was paid for. Two investors can own identical buildings, one with a mortgage and one without, and report the same NOI. That is what makes it the numerator of a cap rate: the property is being valued, not the financing.
The line between operating and non-operating is where the figure is won or lost. Management, taxes, insurance, utilities and routine repairs are operating. Loan payments, capital improvements and the owner's income tax are not. A roof replacement pushed into operating expenses understates NOI and drags the cap rate down with it.
Effective gross income comes first: scheduled rent less the vacancy allowance. The NOI calculator walks that order, how cap rates work uses the result, and how rental cash flow works continues past the mortgage.