The direct answer
NOI equals effective property operating income minus operating expenses. Effective income reflects the vacancy and collection assumptions. Debt service, depreciation, investor income tax and acquisition spending are outside this property operating subtotal.
Build the income bridge
Begin with potential rent and identify other operating income. Apply a vacancy or collection allowance consistently. Some other-income items may not vary directly with occupancy, so a single vacancy percentage on all revenue is a simplified convention. Document that choice or adjust the consolidated income assumption before using the calculator. An income bridge is more informative than copying a single seller-provided NOI number without its components.
To apply the approach to an editable scenario, use the NOI Calculator. For the neighboring question, explore Cap Rate Calculator.
Classify expenses by what they pay for
Recurring expenses of operating the property can include insurance, property taxes, ordinary maintenance, management and owner-paid utilities. Financing payments are a different layer. Depreciation is a noncash accounting item, and tax deductions are not a substitute for an operating classification. Capital replacements may be treated through separate reserves in different analyses; state the convention and do not deduct both the replacement and an overlapping reserve.
Compare NOI only on the same basis
One property’s NOI may include a management allowance while another assumes owner management at no cost. That difference can dominate a comparison. Review the period, occupancy, expense responsibility and reserve treatment before dividing NOI by value. Commercial properties also require attention to tenant reimbursements: count recoveries and the costs they reimburse consistently instead of treating a reimbursement as cost-free extra income.
Worked example
Potential rent of $48,000 plus $2,000 of other income gives $50,000. At 5% modeled vacancy, effective income is $47,500. Deduct $15,000 of annual operating expenses for $32,500 NOI. A $20,000 debt payment would reduce cash flow to $12,500, but it would not change this NOI.
Common mistakes and limitations
IRS rental-expense material explains tax reporting context; it is not a ready-made definition of valuation NOI. A cost can be deductible for tax purposes while still requiring a different treatment in an operating valuation model.
NOI conventions vary in treatment of reserves and owner-specific expenses; debt service and depreciation must not be included as operating expenses.
Frequently asked questions
Are principal and interest included in NOI?
No. Debt service is deducted after the property operating subtotal when estimating equity cash flow.
Can NOI be negative?
Yes. If effective income is below operating expenses, the model has negative NOI. Review both the inputs and the operating assumptions.
Sources and further reading
The article’s examples are illustrative arithmetic. The references below provide context for operating, valuation or transaction concepts; they do not endorse the assumptions or the calculator.
- IRS — Publication 527 (2025), Residential Rental PropertyRental income and expense concepts; operating/rental expense context.
- Office of the Comptroller of the Currency — Comptroller's Handbook — Commercial Real Estate LendingNOI, direct capitalization, cap-rate valuation and DCF concepts for commercial real estate.
- Appraisal Institute — Basic Formulas — Income CapitalizationIncome/cap-rate/value relationships, gross income multiplier and debt-coverage formula references.
Read our editorial policy for the scope of these educational methods.