Guide
Gross Rent vs. Net Operating Income (NOI)
Gross rent is the starting line, not the result. Net operating income is what the properties earn after operating costs, and it is the figure a cap rate is built on.
The definitions
- Scheduled (gross) rent: contract rent under the leases, usually shown per month or per year.
- Effective income: scheduled rent minus vacancy and collection loss, plus any other income.
- Operating expenses: property taxes, insurance, HOA dues, repairs and maintenance, management, owner-paid utilities and similar costs. Loan payments are not operating expenses.
- Net operating income (NOI): effective income minus operating expenses.
- Cap rate: NOI divided by price.
An illustration with made-up numbers
These numbers are invented to show the arithmetic. They are not this portfolio and not a market figure.
| Scheduled rent, 12 months | $24,000 |
|---|---|
| Less vacancy and collection loss (5%) | −$1,200 |
| Effective income | $22,800 |
| Less operating expenses (taxes, insurance, HOA, repairs, management) | −$10,300 |
| Net operating income | $12,500 |
| Cap rate at a $250,000 price | 5.0% |
Figured on gross rent instead, the same home would look like a 9.6% “cap rate”, which is why a cap rate must always be figured on NOI and shown with its assumptions.
Financing is a separate question
Your loan payment, down payment and interest rate change your cash flow, not the property’s NOI. Compare properties on NOI, then test your financing. Try the cap rate calculator and the rental cash flow calculator.
Written by Michael O’Neal, Broker · REALTOR®, Texas license #624124 (TREC record), who owns rental property in Greater Houston. General information, not tax, legal or lending advice. Reviewed Oct. 26, 2026.
Can a cap rate be calculated on gross rent?
No. A cap rate is net operating income divided by price. Using gross rent leaves out vacancy, taxes, insurance, HOA dues, repairs and management, so it overstates the return. Ask for the NOI and the assumptions behind it.
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