Net operating income, or NOI, sets the price of almost every piece of commercial real estate in the country. Single tenant net lease properties carried an average cap rate of 6.82% in the second quarter of 2026. At that rate, each extra $1 of NOI adds about $14.66 to what a building is worth.
But that might be getting into the weeds a little too fast.
In this article, we’ll cover how to calculate NOI, how to get from that number to cash flow, and why two buildings with matching income can pay their owners very differently.
Key Takeaways
- ▸NOI is a property’s revenue minus its operating expenses over a year.
- ▸Operating expenses include property taxes, insurance, and upkeep.
- ▸Income taxes, debt service, depreciation, and capital costs are not included.
- ▸Cash flow is NOI minus debt service minus capital costs. That is the money an owner keeps (aka the reason a lot of investors buy real estate in the first place).
What Is NOI in Real Estate?
NOI is a property’s total revenue minus its operating expenses over a year.
It leaves out loan costs, income taxes, and capital spending. That makes it the cleanest way to compare two buildings on their own merits.
The formula is simple. Effective gross income minus operating expenses equals NOI.
Say a property brings in $1M and costs $300,000 a year to operate. Its NOI is $700,000.
$1M – $300K = $700,000.
Effective gross income – operating expenses = NOI.
That one figure heavily influences three choices: the appraiser’s value, the lender’s loan size, and the buyer’s offer.
It also makes up the numerator in the cap rate formula, since cap rate divides income by market value.
That’s all pretty straightforward (assuming you have the effective gross income and operating expenses already worked out), but it’s important to note what NOI doesn’t include when you’re using it to evaluate properties…
What NOI Doesn’t Take Into Account
So, why does NOI not take into account loan costs and capital expenditure? Because those costs are individual and variable.
When calculating NOI, investors and real estate professionals are looking for a nice number that they can use to compare all different types of assets (kind of like cap rate).
Interest on a 4% loan over 25 years looks nothing like interest on a 6% loan over 30 years.
If you have a strong credit score and solid balance sheet, a deal might “pencil out” for you while someone else might be underwater on it.
Income taxes are also not taken into account, for the same reason.
Two owners in different brackets will owe different amounts on the same income.
Common mix up. Property taxes do belong in NOI. Real estate taxes, insurance, utilities, repairs, and management fees are all operating expenses, so each one lowers the figure. What the calculation leaves out is income tax, debt service, depreciation, and capital spending.
The Components That Make Up NOI
Lease payments. This is how much rent you’re collecting on the property, and it makes up the bulk of revenue.
Expense reimbursements. Tenants often repay the owner for the cost of running the building. Taxes, electricity, and water are common examples. Office, retail, and industrial deals are where these show up most.
Other income. Parking, signage, rooftop leases, and storage are usually a relatively small portion of overall returns, but they still count as revenue.
Vacancy. Empty space is not a cost, but vacancy does affect how much you can collect, so it can lower the total (an exception, of course, is a single tenant on a long lease).
Operating expenses. Everything it takes to run and insure the building: taxes, insurance, utilities, repairs, management, and common area upkeep.
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How to Calculate Cash Flow From NOI
Cash flow: The reason that a lot of investors love real estate. Take NOI, subtract the year’s debt service, then subtract capital costs. It’s that simple.
Illustrative scenario:
Carry the earlier example forward. Assume $150,000 a year in debt service and $50,000 in capital costs:
$1,000,000 gross revenue
Less $300,000 in operating expenses
$700,000 NOI
Less $150,000 in debt service
Less $50,000 in capital costs
$500,000 in cash flow
At its core, when someone is calculating NOI for real estate investment purposes, what they REALLY want to know is how much cash flow that property will put in their pocket. A high NOI will likely lead to high cash flow, but that isn’t always the case.
Capital costs are big replacements that could significantly cut into how much money you’re taking home: the roof, the HVAC, the parking lot, the shell of the building.
NOI doesn’t take any of those into account.
Why is that problematic? Because investors sometimes look at NOI and treat it as cash flow, which is something we’ll get into in a second…
Why Not All NOI Is the Same
Two buildings can report the same NOI and have significantly different cash flow. Not all NOI is the same.
Take that $700,000 and picture it coming from two places: one absolute NNN property with a single tenant, and a portfolio of five rental houses.
Under an absolute NNN lease, the tenant covers taxes, insurance, and upkeep, and usually the roof and structure too. Landlord duties are incredibly low and virtually nothing is coming out of pocket.
You can expect rentals, on the other hand, to have completely different ongoing expenses. A roof runs $8,000 to $15,000 per unit on a 20 to 25 year cycle ($400 a year set aside on the low end). An HVAC unit runs $5,000 to $7,500 every 12 to 15 years ($416 a year on the low end). Factor in flooring costs (new floors every 20 years or so at $1.50/sf x 1500sf adds up to about $120 a year). We’re already at $1,000 per unit per year. Factor in new paint as needed, new windows, new toilets, new sinks, new plumbing, etc.
The costs add up quickly.
None of that shows up in NOI. All of it shows up in cash flow.
The Bottom Line: NOI Is the Starting Point
NOI measures how a building performs as a building, apart from who owns it or how they paid.
That makes it the right tool for comparing two deals, but you shouldn’t mistake NOI for cash flow. NOI, despite being “net,” can still be seen as a “top line” number because you haven’t yet factored in many of the costs associated with ownership.
NOI doesn’t take into account debt service or capital expenditures. When you’re comparing two deals, you should really run the numbers exhaustively on both in order to see how it all pencils out.
Custom Capital has acquired more than $460M in real estate across 125+ closed deals. On every one, the underwriting question was the same: what does this NOI leave out? Our closed deals and the investors behind them show how that plays out.
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Custom Capital sources and underwrites single tenant absolute NNN property for accredited investors, and we read the expense line before anyone signs anything.
For accredited investors only. Nothing here is investment, tax, or legal advice.
Frequently Asked Questions
Do property taxes count in NOI?
Yes. Real estate taxes are an operating expense, so they lower the figure. The tax that stays out is the owner’s income tax, since that depends on the owner rather than the building.
Is a higher NOI always better?
Not always. The calculation leaves out capital costs. A building with strong NOI and an aging roof may pay less than one with a weaker figure and a tenant who covers the structure. Weigh the repair bills next to the income.
What is the difference between NOI and cash flow?
NOI is income after operating expenses. Cash flow goes further and subtracts debt service and capital costs. What is left is the money an owner can spend or hold.
Does NOI include capital expenditures?
No. NCREIF and MBA rules place reserves and capital spending below the NOI line. That keeps the figure comparable across buildings of different ages.
How does NOI set a property’s value?
Buyers and appraisers divide NOI by a market cap rate. At a 6.82% cap rate, an extra $1 of income is worth about $14.66 in value. Small shifts in the expense line can move a price a lot.
This article is for informational purposes only and is not investment, tax, or legal advice. Cap rates, reserve figures, and expense ranges cited reflect market data available as of July 2026 and may change. Consult your own advisors before making any investment decision.
