The total income generated by a rental property minus all operating expenses, before mortgage payments and income taxes. Operating expenses include property taxes, insurance, maintenance, property management, utilities (if landlord-paid), and vacancy allowance. NOI does not include mortgage principal or interest payments, making it useful for comparing properties regardless of financing.
Why It Matters
NOI is the truest measure of a property's earning power because it strips out the financing variable. Two investors can buy the same property with very different mortgages, but the NOI is the same. It's the numerator in the cap rate formula and the foundation of any serious investment analysis.
Real-World Example
You own a rental duplex in Kitchener that generates $3,600 per month in total rent ($43,200 annually). Your annual operating expenses include property tax ($5,400), insurance ($2,400), maintenance and repairs ($3,000), property management at 10% ($4,320), and a 5% vacancy allowance ($2,160). Total operating expenses are $17,280. Your NOI is $43,200 minus $17,280, which equals $25,920. Notice that your mortgage payment is not included in NOI -- this is intentional, as NOI measures the property's earning power independent of financing.
Ontario & GTA Context
When calculating NOI for Ontario rental properties, include property taxes (which vary by municipality), landlord insurance, maintenance costs, property management fees, utility costs if paid by the landlord, and a vacancy allowance. Ontario's Landlord and Tenant Board processes can create extended vacancies during evictions, so a slightly higher vacancy allowance of 5% to 8% is prudent for GTA calculations.
How It Works in Practice
Calculate NOI using actual or well-researched estimated expenses, not rules of thumb. Common expenses that new investors forget include property management fees, capital expenditure reserves, vacancy allowances, and municipal licensing fees. A property's NOI divided by the purchase price gives you the cap rate, and NOI minus your annual mortgage payments gives you your pre-tax cash flow.
Common Questions
Why does NOI exclude mortgage payments?▾
What expenses are included in NOI calculations?▾
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