What is net operating income (NOI) and how to calculate it

For anyone managing a property – whether it is a single holiday let or a sprawling commercial portfolio – understanding the financial health of your investment is essential. One of the most critical metrics used to assess this health is Net Operating Income, or NOI.

In this guide, we’ll break down exactly what NOI is, how it differs from other financial figures and how you can calculate it to make better investment decisions. We will also look at how digital tools like Touch Stay can help streamline your operations and improve your bottom line.

In this article, we’ll cover:

• What is net operating income (NOI)?
• What counts as income and what counts as an expense
• Operating expenses included in NOI
• Expenses not included in NOI
• How to calculate NOI
• Why NOI is useful for investors
• NOI and related metrics
• Common calculation mistakes
• How to track NOI?
• Conclusion
• FAQ's

What is net operating income (NOI)?

Net operating income is a formula used to determine the profitability of an income-generating property. It measures the total income produced by a property after all necessary operating expenses have been deducted, but before taxes and interest payments are considered.

Why NOI matters for investors

Investors use NOI to see how much a property earns through its daily operations. Because it excludes financing costs and personal income tax, it provides a ‘clean’ look at the property’s ability to generate cash. It is the primary figure used to calculate the ‘Capitalisation Rate’ (Cap Rate), which helps determine the market value of a property.

How NOI differs from net income

While they sound similar, they are distinct. Net income is the ‘bottom line’ figure on a profit and loss statement; it includes everything, including mortgage interest, depreciation, and taxes. NOI, however, focuses strictly on the property’s operational efficiency. It tells you how the property performs as an asset, regardless of who owns it or how it is financed.

What counts as income in NOI

To calculate NOI accurately, you must first identify every pound the property generates. This is not limited to just the rent.

Rental income from leases

This is the primary driver of income. It includes the gross potential rent you expect to receive if the property were fully occupied. For short-term rentals or holiday lets, this is the total of all booking fees before any commissions are taken by platforms like Airbnb or Booking.com.

Other operational income

Properties often generate secondary revenue. Common examples include:

• Parking fees: Charging for allocated spaces
• Laundry facilities: Income from coin-operated machines
• Vending machines or honesty bars: Common in guest houses
• Late fees: Charges applied when tenants miss payment deadlines
• Pet fees: Non-refundable deposits or monthly ‘pet rent’

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Operating expenses included in NOI

Operating expenses are the costs required to keep the property running and in a habitable state.

Property taxes and insurance

These are non-negotiable costs. Regardless of whether the property is empty or full, you will need to pay local authority taxes (such as business rates for holiday lets) and maintain comprehensive buildings and liability insurance.

Maintenance and repairs

This covers both routine upkeep – like gardening, window cleaning and gutter clearing – and reactive repairs, such as fixing a leaking tap or repairing a broken fence.

Property management fees

If you employ a professional manager or an agency to handle bookings, guest communication and check-ins, their fees are a direct operating expense.

Utilities and administrative costs

For many short-term rentals, the host covers the cost of Wi-Fi, electricity, water and heating. Administrative costs include office supplies, software subscriptions and marketing expenses.

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Vacancy losses and bad debt

You must account for the time the property sits empty. This is subtracted from your gross potential income. Similarly, if a tenant fails to pay rent (bad debt), that loss is factored into the ‘expenses’ side to arrive at a realistic NOI.

Reducing admin costs with digital tools

Administrative overhead is often where ‘profit leakage’ occurs. For property managers, answering repetitive guest questions, like, "How do I work the oven?" or "What’s the Wi-Fi password?" consumes valuable time that could be spent on growth.

By using digital tools like Touch Stay, you can significantly reduce these administrative burdens. A digital guidebook provides guests with all the information they need in an accessible, mobile-friendly format. This reduces the volume of incoming queries, allowing you to manage more properties without increasing your headcount.

Ready to reclaim your time and boost your operational efficiency?

Expenses not included in NOI

One of the most common mistakes in property accounting is including ‘non-operating’ costs in the NOI calculation. To keep the figure accurate, exclude the following:

Debt service

Mortgage payments (both principal and interest) are specific to the owner, not the property itself. Since NOI is used to evaluate the asset's performance, financing costs are ignored.

Income taxes

Your personal or corporate income tax obligations vary based on your specific tax bracket and structure. Therefore, they do not reflect the property’s inherent profitability.

Capital expenditures (CapEx)

CapEx refers to major investments that add long-term value, such as replacing a roof or installing a completely new kitchen. These are treated as investments in the asset rather than day-to-day operating costs.

Depreciation and amortisation

These are accounting entries used for tax purposes to spread the cost of an asset over its useful life. They are non-cash expenses and do not impact the actual operational cash flow.

How to calculate NOI

The calculation itself is straightforward once you have organised your figures.

Formula: Total Income − Operating Expenses = NOI

Example calculation

Imagine you own a holiday let in Cornwall. Here is a breakdown of its annual performance:

Tips for estimating vacancy accurately

Do not guess your vacancy rate. Look at local market data or your previous three years of performance. For holiday lets, remember to account for seasonality; a 100% occupancy rate in August does not mean you will achieve the same in January. Be conservative with your estimates to ensure your NOI remains a reliable figure for planning.

Why NOI is useful for investors

Understanding your NOI is about more than just knowing your profit; it is a tool for strategic growth.

Standardises profitability comparisons

NOI allows you to compare two different properties on an ‘apples-to-apples’ basis. For example, a property with a £1m mortgage and one owned outright might have different net incomes, but if their NOIs are identical, they are equally efficient assets.

Helps determine property value via cap rate

The Cap Rate is calculated by dividing the NOI by the property’s purchase price (or current market value).

Cap Rate = NOI ÷ Property Value

If you know the average Cap Rate for your area, you can rearrange this formula to estimate what a property is worth based on the income it generates.

Guides investment decisions and due diligence

When buying a property, reviewing the seller's NOI helps you spot red flags. If the maintenance costs seem suspiciously low, they may be deferring essential repairs. If the income seems high, they might be overestimating the potential rent.

NOI and related metrics

While NOI is powerful, it works best alongside other financial indicators.

Cap rate

As mentioned, this tells you the expected rate of return on an investment property. A higher Cap Rate usually indicates higher risk but higher potential reward.

Cash-on-cash return

This measures the annual return you made on the property in relation to the amount of actual cash you invested (your deposit and closing costs). Unlike NOI, this does include debt service.

Debt service coverage ratio (DSCR)

Lenders use this to see if the property generates enough income to cover its own mortgage.

DSCR = NOI ÷ Annual Debt Service

A DSCR of 1.0 means the property breaks even. Most lenders look for a ratio of 1.25 or higher.

Common calculation mistakes

Avoid these three pitfalls to ensure your data remains useful:

1. Including debt service: It cannot be stressed enough – keep your mortgage out of the NOI!
2. Failing to adjust for vacancy: Assuming 100% occupancy is the fastest way to overinflate your property's value.
3. Ignoring non-recurring costs: While one-off repairs are operating expenses, try to look at an average over several years so a single ‘bad year’ for repairs doesn't skew your perception of the property’s long-term health.

How to track NOI?

Financial management is not a ‘once-a-year’ task.

Annual vs. quarterly review

While an annual review is necessary for tax season, a quarterly review allows you to spot trends. Are your utility costs creeping up? Is your vacancy rate higher than expected for this season? Catching these early allows for tactical adjustments.

Forecasting NOI for projections

If you are planning renovations or considering a change in management strategy, use your current NOI as a baseline. Forecast how a 5% increase in rent or a 10% reduction in admin costs (through automation) would impact your bottom line.

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Key takeaways & recommendations

Net Operating Income is the heartbeat of property investment. It tells you exactly how much your asset is earning after the lights are kept on and the grass is cut.

To improve your NOI, you have two levers: increase income or decrease operating expenses. While you cannot always control the market rent, you can control your operational efficiency. Reducing the time you spend on manual administration is one of the most effective ways to lower your overheads.

Next steps for property owners:

1. Audit your current expenses: Look for ‘hidden’ costs like excessive time spent on guest communications.
2. Calculate your current NOI: Use the formula provided above to get an honest look at your performance.
3. Automate to save: Implement digital guidebooks to streamline your operations and improve the guest experience simultaneously.

By focusing on NOI, you move away from guesswork and towards data-driven property management that values both your time and your profit.

Frequently asked questions