How to calculate net operating income
Net operating income is what a property earns after operating costs and before financing. It is the basis for cap rate and DSCR.
The formula
NOI = gross rental income − vacancy loss − operating expenses
Worked example
Gross rent of $36,000, vacancy of $1,800 and expenses of $12,000 give an NOI of $22,200.
How to use this calculator
Enter the gross rent, any other income, the vacancy and credit loss, and the total operating expenses. The NOI calculator shows net operating income, effective gross income, the operating expense ratio and NOI per month. Follow the period shown on each field so the inputs match. Gross rent is what the property would collect if it were full all year.
What the result means
NOI is the income the property itself produces, whoever owns it and however it is financed. Two buyers with different loans get the same NOI from the same building. That makes it the standard figure for comparing properties and for valuing them.
The example’s $22,200 can be read three ways:
| Use | Calculation | Result |
|---|---|---|
| Cap rate at an example price of $370,000 | $22,200 ÷ $370,000 | 6.0% |
| DSCR with example loan payments of $17,760 a year | $22,200 ÷ $17,760 | 1.25 |
| Share of gross rent used by expenses | $12,000 ÷ $36,000 | 33.3% |
Many lenders prefer a DSCR of 1.20 to 1.25 or higher, so this example sits at the upper end of that range. The 50% rule of thumb assumes operating expenses take about half of the rent. An expense share well below that, such as the 33.3% here, is a prompt to check that nothing has been left out.
More examples
Starting from the same property, change one input at a time:
| Scenario | NOI | Change |
|---|---|---|
| Base case | $22,200 | |
| Vacancy doubles from 5% to 10% ($3,600) | $20,400 | −$1,800 |
| Expenses rise 10% to $13,200 | $21,000 | −$1,200 |
| $1,200 a year of parking income is added | $23,400 | +$1,200 |
These changes matter more than they look. At a 6% cap rate, each $1,000 of NOI represents about $16,667 of value, because $1,000 ÷ 0.06 = $16,667.
What changes the result
- Gross rental income. Higher rent raises NOI dollar for dollar, less the vacancy allowance on it.
- Vacancy loss. The example uses $1,800, which is 5% of gross rent. Use the property’s own history when you have it.
- Operating expenses. Every dollar of expense removes a dollar of NOI. Property tax and insurance are usually the hardest to reduce.
- Other income. Parking, laundry and storage fees add to NOI when they are regular.
Common mistakes
- Subtracting the mortgage. Loan payments come after NOI.
- Counting a new roof or other capital improvement as an operating expense.
- Using a seller’s figures without checking. Ask for actual statements, and look for missing items such as management or repairs.
- Leaving out management because you do the work yourself. A buyer or lender will usually count it.
- Mixing monthly and yearly numbers in the same calculation.
Related calculators
To carry NOI through to cash flow and returns, use the rental property calculator. The gross rent multiplier calculator gives a quicker screen that uses rent alone, and the property management fee calculator estimates one of the larger operating expenses.
Frequently asked questions
Does NOI include the mortgage?
No. Loan payments, depreciation, income tax and major capital improvements are excluded.
What are operating expenses?
Property tax, insurance, repairs, management, utilities, landscaping and similar running costs.
Is NOI the same as cash flow?
No. Cash flow is NOI minus loan payments. With an NOI of $22,200 and loan payments of $17,760 a year, cash flow is $4,440.
Is NOI monthly or yearly?
It is usually stated per year, because cap rate and DSCR use yearly figures. Divide by 12 for a monthly view. $22,200 a year is $1,850 a month.
Can NOI be negative?
Yes. If vacancy and operating expenses are greater than gross rent, the property loses money before any loan payment.
How do I turn NOI into a property value?
Divide it by a cap rate. $22,200 at a 6% cap rate is $370,000. The cap rate you choose drives the answer, so base it on comparable sales in your market.