Net Operating Income (NOI)

NOI strips a property down to its operating performance. You start with effective gross income (rent collected, adjusted for vacancy) and subtract operating expenses such as property taxes, insurance, management, maintenance, and utilities the owner pays. What you deliberately leave out is just as important: NOI excludes mortgage principal and interest, income taxes, depreciation, and large capital improvements.

Holding financing out is what makes NOI comparable across properties regardless of how each is funded, and it is the income figure that feeds the cap rate. The categories of deductible operating expenses for a rental align with those described in IRS Publication 527, though NOI is an investment metric rather than a tax figure, so the two are calculated for different purposes.