Net operating income is the property's income after operating expenses but before debt service. It is the number every other metric leans on — cap rate, DSCR, valuation — so if NOI is wrong, everything downstream is wrong too.
What goes in
Start with all rental income actually collected, plus other income (laundry, parking, pet fees). Subtract operating expenses: property taxes, insurance, maintenance and repairs, property management, utilities you pay, and a vacancy allowance. NOI = effective income minus operating expenses. Mortgage payments, depreciation, and capital expenditures stay out.
What stays out
Debt service is excluded so properties can be compared regardless of how they're financed. Capital expenditures — a new roof, a full HVAC replacement — are excluded because they're investments in the asset, not recurring operating costs. Income taxes are personal to you, not the property. Mixing any of these in makes your NOI incomparable to anyone else's.
The honesty checklist
Small-portfolio NOI goes wrong the same few ways: using asking rent instead of collected rent, skipping a vacancy allowance (5–8% of gross rent is a common placeholder), forgetting management (budget 8–10% even if you self-manage — your time isn't free), and lowballing maintenance. If your expense ratio is under 30% of gross rent, double-check it; 35–50% is typical for older residential stock.
Worked example
A fourplex collects $4,800/month, so $57,600/year, plus $1,200 in laundry income: $58,800 effective income. Expenses: $6,200 taxes, $2,400 insurance, $4,800 maintenance, $4,700 management (8%), $2,900 vacancy allowance (5%) — $21,000 total. NOI = $58,800 − $21,000 = $37,800. At a 6.5% market cap rate, that supports a value around $580,000.
When this rule of thumb breaks
NOI is a trailing measure: it says nothing about the lease that expires next month or the tax reassessment coming after your purchase. New construction has artificially low maintenance for years; deferred-maintenance buildings have artificially low expenses until the bill arrives. And one-off windfalls (an insurance payout, a lease-break fee) don't belong in NOI — normalize them out before you rely on the number.