Net Operating Income (NOI)
Annual income after all operating expenses but before mortgage payments, depreciation, and income taxes. The foundational number for cap rate, DSCR, and property valuation. Formula: Gross Revenue − Operating Expenses.
Definition
What is Net Operating Income (NOI)?
Net Operating Income (NOI) is the annual income a property generates after subtracting all operating expenses but before deducting mortgage payments, income taxes, or depreciation. NOI is the foundational income figure in real estate investment analysis — it flows directly into cap rate calculations, DSCR underwriting, and property valuation. Because NOI excludes financing costs, it represents a property's intrinsic earning power independent of how it is purchased or financed.
For STR properties, calculating accurate NOI requires precision on both the revenue and expense sides. Revenue inputs include gross nightly income plus any add-on fees (early check-in, late checkout, pet fees, etc.), minus OTA platform fees (Airbnb and Vrbo typically charge hosts 3–5% of the booking value). Operating expenses include property management fees (typically 15–25% of revenue), repairs and maintenance, utilities, property taxes, homeowners insurance, HOA dues, consumable supplies, STR licensing fees, and short-term rental-specific costs like linens and toiletries.
Two systematic errors inflate STR NOI projections: using gross platform revenue before deducting host fees, and omitting infrequent but real expenses like capital repairs, periodic vacancy, and professional management costs. A conservative, accurate NOI is the bedrock of reliable investment analysis. Chalet's STR calculator builds NOI from market-verified ADR and occupancy data — specific to the target address, not market averages — to produce more realistic projections.
Formula
NOI = Gross Revenue − Operating Expenses
Real-world example
Scenario
An STR in Asheville, NC generates $85,000 in gross revenue. Annual operating expenses: property management (20%) = $17,000, maintenance = $4,200, property tax = $5,600, insurance = $2,100, utilities = $3,600, supplies/misc = $1,800. Total expenses = $34,300.
Calculation
NOI = $85,000 − $34,300 = $50,700. Annual debt service at 7.25% on a $520,000 loan (30yr) = $42,600. DSCR = $50,700 ÷ $42,600 = 1.19.
Result
NOI of $50,700 falls slightly below the DSCR threshold of 1.25 at this loan size. The investor has options: put more down to reduce debt service, optimize pricing to grow revenue by ~$5,000/year, or self-manage to reduce PM fees and reclaim ~$8,000 in operating expense.
Why it matters for STR investors
NOI is the number that drives everything else. Cap rate = NOI ÷ property value. DSCR = NOI ÷ debt service. Property valuation often uses NOI ÷ market cap rate. Get NOI wrong, and every derived metric is wrong. Building an accurate NOI model with market-verified revenue data is the single most important step in STR investment analysis.
Key points
- Excludes mortgage payments, depreciation, and income taxes
- Used directly in: Cap Rate = NOI ÷ Property Value
- Used directly in: DSCR = NOI ÷ Annual Debt Service
- Two most common errors: overstating revenue, understating expenses
- Platform host fees (3–5%) are operating costs — must be included
- Self-managed STR expense ratio: ~25–35% of revenue; professionally managed: ~40–50%
- Cleaning fees collected from guests and paid to cleaners are typically a wash — often excluded from NOI
Related terms
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