NOI vs ROI: What Each One Measures, and When to Use It

NOI vs ROI is a question about scope. Net operating income measures the property. Return on investment measures you, or more precisely the cash you put into the property. A $500,000 rental has one NOI and as many ROIs as there are ways to buy it.

NOI vs ROI at a glance

	Net operating income	Return on investment
What it measures	What the property earns in a year	What you earn on the cash you invested
Expressed as	Dollars	A percentage
Mortgage included	No	Yes
Purchase price included	No	Yes
Appreciation included	No	In most versions
Definition	One standard definition	Varies with who is calculating
Main use	Value, lender underwriting, comparing buildings	Comparing a deal to other uses of your money

Two buyers looking at the same house will agree on its NOI and disagree on its ROI. That is not a flaw in either number.

What net operating income measures

NOI is effective gross income minus operating expenses. Nothing else goes in it.

The default property on this site is a $500,000 house renting for $4,000 a month, which is $48,000 a year. Allow 5% for vacancy and collected income is $45,600. Operating expenses are $6,000 of taxes, $2,500 of insurance, and 18% of collected income, $8,208, for maintenance, reserves and management. That is $16,708 of expenses and $28,892 of NOI, or $2,407.67 a month. The NOI formula guide walks every line.

Four things NOI leaves out: the mortgage, income taxes, depreciation, and the price you paid. Leaving them out is deliberate. It means NOI describes the building’s earning power and says nothing about the buyer. Divide it by the price and you get the cap rate, 5.78% here, which is how NOI turns into value. NOI and cap rate valuation covers that side.

NOI is also the number other people check on you. A lender compares it to the loan payment. An appraiser rebuilds it with market rent and a market management fee. A seller’s pro forma usually overstates it.

What return on investment measures

ROI is return divided by cash invested, and both halves are chosen by whoever writes them down. That is the real difference between the two measures. NOI has one definition. ROI has a family of them.

Cash on cash return

Annual pre-tax cash flow divided by the cash you put in: down payment, closing costs and up front repairs. See cash on cash return for the mechanics.

First year total return

Cash flow plus the principal you paid down, sometimes plus an appreciation estimate.

Internal rate of return

Every cash flow across the hold, plus the sale, stated as one annual rate.

So when a listing advertises a 12% ROI, the first question is which version it means and what went in the denominator. Ask for the NOI instead. NOI you can check line by line.

A $500,000 property with its NOI and its ROI side by side

All cash first. You pay $500,000, the property earns $28,892, and your return is 28,892 divided by 500,000, or 5.78%. That matches the cap rate, because the cap rate is the all cash return before financing. Count closing costs and it slips. At 2% of the price, $10,000, you have $510,000 in and a 5.67% return. Closing costs vary with your state, title fees and lender, so use your own.

Now finance it. You put in $100,000 and borrow $400,000 over 30 years. Investor loan rates move with the market and with your credit, so quote your own rate. At 6.5% the payment is $2,528 a month, or $30,339 a year. The $28,892 of NOI does not cover it. Cash flow is negative $1,447 and cash on cash is negative 1.4%. Add the $4,470 of principal you retired in year one and the first year total return is $3,024, or 3.0% on the $100,000.

Measure	Figure
NOI	$28,892
Cap rate at $500,000	5.78%
All cash return	5.78%
All cash return after $10,000 of closing costs	5.67%
Cash on cash, 20% down at 6.5%	-1.4%
First year total return with principal paydown	3.0%

Same house, same rent, same expenses. One NOI, three ROIs.

Why the loan lowered the return here

Compare the loan constant to the cap rate. Annual debt service divided by loan amount is 30,339 over 400,000, or 7.58%. Each borrowed dollar costs 7.58 cents a year and buys 5.78 cents of NOI. On a 30-year amortizing loan the constant passes 5.78% at roughly a 4% interest rate, so at this rent and this price most loans will pull cash on cash below the all cash figure. Raise the NOI or buy for less and the comparison flips. NOI vs cash flow works through the payment side in detail.

Appreciation is the piece people add to make an ROI look better. It depends on the market and is not knowable in advance, so keep it on its own line rather than folded into one headline percentage.

The simple version

The simple tab takes $50,000 of gross income, 5% vacancy and $17,500 of expenses, which gives $30,000 of NOI. On a $500,000 price that is a 6% cap rate and a 6% all cash return. The two numbers meet only in the all cash case. Every loan separates them again.

Which number to use when you are judging a deal

• Is the price fair? NOI and the market cap rate.
• Will a lender fund it? NOI against the annual loan payment.
• Should I buy this or do something else with the money? ROI, with the version named.
• Which of two properties is stronger? Compare NOI per dollar of price, because ROI mixes in each buyer’s loan.
• Is the listing’s ROI claim real? Rebuild the NOI yourself first.

Underwrite the NOI before the ROI in every case. ROI is built on top of it, so an NOI that is $3,000 optimistic makes every return figure below it wrong by more than $3,000 once leverage is involved.

Run both on your own numbers

Put your rent, vacancy and expenses into the NOI Calculator and it returns effective gross income, operating expenses, NOI by month and by year, and the cap rate at your price. That gives you the NOI side and the all cash return in one pass. Subtract your own loan payment from the NOI, divide by the cash you are putting in, and you have the ROI side too.