Net Operating Income (NOI)

Net operating income is rental income after vacancy and operating expenses, before any mortgage payment, depreciation or income tax. It is the starting point of the cash on cash numerator: cash flow equals NOI minus debt service. Cap rate divides the same NOI by price.

Operating expenses include property taxes, insurance, management, maintenance, capital reserves, owner-paid utilities and HOA dues. They exclude principal, interest and improvements. On $2,600 of rent with 5% vacancy, $4,200 of taxes and insurance, and 18% of collected rent for the rest, NOI is $20,105.

Every point of cash on cash return traces back to a line in NOI. Omitting management adds about 3 points on the default deal; omitting reserves about 2; omitting vacancy about 1.7. A return that looks good only because the NOI is missing expenses is not a good return. The Wikipedia article on net operating income redirects to earnings before interest and taxes, the corporate form of the same measure.

Further reading: Net Operating Income (NOI) on Wikipedia.