# How to Calculate NOI in Real Estate: Formula, Example & Common Mistakes

Net operating income drives a property's value, its cap rate, and whether a lender will finance it. Here is the formula, a full worked example, and the mistakes that inflate NOI.

**Author:** Nathaniel Pitchon-Getzels (Licensed Real Estate Partner & Investment Strategist) — https://www.scouthavens.com/about
**Published:** 2026-10-05
**Category:** Financial Modeling & Returns
**Canonical URL:** https://www.scouthavens.com/blog/how-to-calculate-noi-real-estate

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## What Is Net Operating Income (NOI)?

Net operating income (NOI) is the money a property earns in a year after paying everything it costs to operate, and before paying the mortgage. It is the single most important number in rental property analysis because it feeds the [cap rate](/blog/cap-rate-vs-cash-on-cash-return), the property's value, and the debt coverage ratio lenders use.

NOI = Effective Gross Income − Operating Expenses

Effective gross income is the rent you actually collect: scheduled rent plus other income (laundry, parking, fees), minus vacancy and collection loss.

## What to Include and What to Exclude

-   **Include as expenses:** property taxes, insurance, property management, repairs and maintenance, utilities you pay, landscaping, and a capital expenditure reserve.
-   **Exclude from NOI:** mortgage principal and interest, income taxes, depreciation, and one-time capital improvements.

Financing is excluded on purpose. NOI measures the property, not your loan, so two investors with different mortgages get the same NOI for the same building.

## Worked Example: A 4-Unit Building

-   **Scheduled rent:** 4 units × $1,500 × 12 = **$72,000**
-   **Vacancy (5%):** −$3,600, so effective gross income = **$68,400**
-   **Property taxes:** $8,400
-   **Insurance:** $3,000
-   **Management (8% of $68,400):** $5,472
-   **Maintenance (6% of $68,400):** $4,104
-   **Utilities:** $2,400
-   **Total operating expenses:** **$23,376**
-   **NOI:** $68,400 − $23,376 = **$45,024**

At a $600,000 purchase price, the cap rate is $45,024 ÷ $600,000 = **7.50%**.

## Five Mistakes That Inflate NOI

-   **Assuming zero vacancy.** Even a well-run building has turnover. Model at least 5%.
-   **Skipping management.** If you self-manage, still charge the property a market fee. Your time has a cost, and a buyer or lender will add it back.
-   **Leaving out reserves.** Roofs, HVAC, and appliances wear out. Set aside a yearly amount, or NOI overstates what you can actually keep.
-   **Trusting the seller's expenses.** Check taxes against the county record, since reassessment after a sale often raises them.
-   **Counting one-time income.** Strip out anything that will not repeat next year.

## Run Your Own Numbers

Use the free [NOI Calculator](/tools/noi-calculator) to build this for any property, then check the result with the [Cap Rate Calculator](/tools/cap-rate-calculator) and [DSCR Calculator](/tools/dscr-calculator). For the full process, follow our [step-by-step deal analysis guide](/blog/complete-real-estate-deal-analysis-guide).

## Frequently Asked Questions

**Q: Does NOI include the mortgage payment?**

A: No. NOI excludes mortgage principal and interest, income taxes, and depreciation. It measures the property's operating performance independent of financing.

**Q: What is the difference between NOI and cash flow?**

A: NOI is income after operating expenses. Cash flow is NOI minus debt service, so it is what you actually keep after paying the loan.

**Q: Should capital expenditures be in NOI?**

A: Routine reserves for replacing roofs, HVAC, and appliances should be modeled, but one-time capital improvements are usually shown separately. Be consistent so comparisons stay fair.

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*Source: Haven by ScoutHavens (https://www.scouthavens.com). Data methodology: https://www.scouthavens.com/methodology.*