If you’re evaluating an investment property, you’ve probably come across the idea of net operating income (NOI). Regardless of property, NOI can provide a decent snapshot of how profitable a property is before financing and taxes come into play. Understanding how to calculate and interpret NOI can help you make smarter investment decisions and secure better financing.
What Is Net Operating Income?
Net operating income (NOI) is a calculation used in real estate to determine a property’s profitability. It measures the income generated by a property after subtracting all operating expenses, but before accounting for mortgage payments, taxes, and capital expenditures. Basically, it answers the question: “How much money does this property make on its own?”
What Does NOI Tell An Investor?
NOI is one of the most powerful tools in real estate investing because it tells investors what the total revenue vs the total operating expenses will be. It takes rent, storage fees, parking fees, and any vending machines or laundry income and subtracts expenses such as maintenance, property management fees, utilities, janitorial services, and insurance. The number left over is the NOI for that specific investment. A growing NOI over time often signals that a property is being operated efficiently or that rental income is increasing, which are both positive indicators for investors.
What To Include When Calculating Net Operating Income
To calculate Net Operating Income (NOI) accurately, you must capture every recurring source of income the property generates as well as all necessary operating expenses required to keep the property functional, rentable, and properly maintained.
Income (Real Estate Revenue: RR)
These are all the predictable, ongoing cash inflows derived directly from the property, including:
Rental Income
This is the primary income source and includes the monthly rent paid by tenants under current leases or fair‑market rent for vacant units based on market assumptions. It forms the backbone of your revenue stream.
Additional Income Streams
Many properties generate extra income beyond rent. Be sure to include all recurring fees such as:
Parking fees (assigned spaces, garages, carports)
Laundry facilities (coin‑operated machines or smart‑pay systems)
Storage unit rentals
Pet fees (monthly pet rent, not one‑time deposits)
Vending machines or shared amenities (e.g., rooftop access fees, clubhouse rentals)
Other Service‑Related Income
If the property consistently earns money from services like cleaning, concierge offerings, or resident events, this income belongs in NOI as long as it’s recurring and operational.
Operating Expenses (OE)
Operating expenses are the costs required to keep the property running and rent‑ready. These expenses should be necessary, recurring, and directly tied to operations, not long‑term improvements.
Property Management Fees
Whether you use a third‑party manager or manage the property yourself, include the management fee or an equivalent market‑rate cost for self‑management. It reflects the true operating cost of managing tenants, maintenance, marketing, and administration.
Maintenance and Repairs
These are the day‑to‑day costs needed to keep the property in good working order:
Routine repairs
Landscaping
Minor plumbing or electrical work
Pest control
Janitorial cleaning
Remember: only ongoing repairs, not large, one‑time upgrades, count as operating expenses.
Property Insurance
This includes hazard insurance, landlord policies, liability coverage, and any other policy required to operate and protect the property.
Utilities (If Paid by the Owner)
If the landlord pays for any utilities, they must be included when calculating net operating income. Common examples:
Water and sewer
Gas
Electricity (for common areas or master‑metered units)
Trash and recycling services
HOA or Condo Fees
If the property is part of a homeowners’ association or condominium board, the monthly or annual fees should be included. These fees often cover shared maintenance, landscaping, and amenities.
Vacancy and Turnover Costs
Vacancy is unavoidable. Include a vacancy allowance (often 3-10%) representing expected lost income from units between tenants. Turnover costs like cleaning, basic repairs, and light repainting should also be included, because they are recurring operational requirements.
Remember that, ultimately, NOI is meant to reflect property performance, not financing structure or tax strategy.
What To Exclude From Net Operating Income Calculations
A common mistake is adding expenses that do not relate to operating performance. These items either reflect financing decisions or long‑term investments, and therefore should not be included when calculating NOI.
Mortgage Payments (Principal and Interest)
Debt service is tied to financing, not operations. NOI is meant to measure the property’s profitability before any financing decisions.
Capital Expenditures (CapEx)
These are major improvements or replacements that extend the property’s life or add value, such as:
Roof replacement
HVAC system replacement
Major renovations
Structural repairs
These costs are large, infrequent, and not considered day‑to‑day operating expenses.
Depreciation
Depreciation is an accounting entry, not a cash expense. Since NOI is a cash‑flow metric, depreciation has no place in its calculation.
Income Taxes
Taxes are tied to the owner’s financial situation, not the property’s operations. Therefore, they are excluded from NOI.
Operating Income vs Net Income: What Is The Difference?
Operating Income (NOI)
This income focuses on the day-to-day performance of the business. It calculates all the profits made after subtracting the operation costs (as explained above). Costs don’t include expenses such as mortgage payments.
Net Income
Net income is the bottom line. So it includes everything that will appear on your books, such as operating income, while adding interest income and gains, and subtracting debt expenses, taxes, and one-time charges. Investors may look at this income to determine long-term viability, but it’s not best to look at net income short-term.
Think of operating income as the property’s raw earning power, while net income reflects what ends up in your pocket after everything is paid.
**Net Operating Income Formula: How To Use With A Real Example **
The net operating income formula is straightforward: Net Operating Income = Real Estate Revenue (RR) – Operating Expenses (OE) Or: NOI = RR − OE
For example, let’s say you own a small rental property:
Rental income: $120,000/year
Additional income: $10,000/year
Total revenue (RR): $130,000
And your operating expenses are:
Property taxes: $15,000
Insurance: $5,000
Maintenance: $10,000
Property management: $13,000
Total expenses (OE): $43,000
To determine NOI, you would subtract your total RR by your total OE. So $130,000 – $43,000 and you’d get an NOI of $87,000. This means that the rental property generates $87,000 in NOI annually, before any loan payments or taxes.
Does Net Operating Income Affect Loan Eligibility?
Yes, net operating income plays a major role in loan approval, especially for investment properties. Lenders use NOI to calculate the Debt Service Coverage Ratio (DSCR), which measures whether a property generates enough income to cover its loan payments. If your NOI is too low, lenders may reduce the loan amount or deny financing altogether.
Colorado Real Estate Loans
If you’re investing in real estate, understanding your numbers is only half the battle, you also need the right financing partner. At Pinetree Financial, we specialize in Colorado real estate loans designed for investors. Whether you’re purchasing your first rental or expanding your portfolio, our team can help you leverage your property’s net operating income to secure the funding you need. Contact us to discuss your investment goals and get matched with the right loan solution.