Net operating income (NOI) is what a rental property earns in a year after you pay the costs of running it, but before mortgage payments and income taxes. It measures the property itself, not your loan, which is why two buyers with different financing see the same NOI.
NOI = effective gross income minus operating expenses
Say a duplex rents for $2,500 a month in total. That is $30,000 a year if it is always full. Allow 5% for vacancy ($1,500) and effective gross income is $28,500. Property taxes, insurance, repairs, management and other operating expenses add up to $10,500. NOI is $28,500 minus $10,500, or $18,000 a year.
A common mistake is trusting an NOI that leaves costs out. Listings often skip vacancy, management and a reserve for big replacements like a roof. Even if you plan to manage the property yourself, your time has a cost. Mortgage principal and interest never belong in NOI. Investors differ on whether to count a reserve for capital expenditures, so check what is included before you compare two figures. NOI feeds cap rate and DSCR, so an inflated NOI makes every number after it look better than it is.