Net operating income calculator
By Jude Wallis
Net operating income is gross rent minus vacancy minus operating expenses. $48,000 of rent less $2,400 of vacancy is $45,600 of effective gross income, and taking out $9,600 of running costs leaves $36,000 of NOI.
Net operating income
$36,000.00
Gross rent minus vacancy minus operating expenses, before debt service.
- Gross rent
- $48,000.00
- Effective gross income
- $45,600.00
- NOI
- $36,000.00
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The formula
The bracket is effective gross income, the rent actually collected. Operating expenses are the costs of running the building. The mortgage and income tax are outside both.
Vacancy comes off before anything else
Gross rent is what the building would collect if every unit were full every month. Nobody collects that. Taking $2,400 of vacancy off $48,000 gives $45,600 of effective gross income, and that is the figure the expenses come out of.
Vacancy can be entered as a dollar amount, as here, or as a percentage of rent. Either is fine as long as it is subtracted once. A pro forma that quotes gross rent and then also applies a vacancy percentage further down has taken it twice.
The mortgage is not an operating expense
This is the line that separates NOI from everything else. Tax, insurance, management, repairs, utilities and vacancy all belong in the $9,600. The loan does not, because the loan belongs to the buyer rather than the building. Two people buying the same property, one in cash and one with a mortgage, have the same NOI.
That is what makes NOI comparable. Put debt service in and you have computed cash flow instead, which is a fine number and a different one. The rental cash flow calculator takes NOI the extra step, and the DSCR calculator divides it by the payments.
Capital items are not operating expenses either
A new roof is not a running cost, it is a capital item, and putting it into a single year's operating expenses makes that year's NOI look far worse than the building. The usual treatment is a reserve: a steady annual figure inside operating expenses rather than one lumpy year.
The temptation runs the other way when selling. Leaving out management because the owner does the work, or leaving out reserves entirely, produces a higher NOI and therefore a higher price at any cap rate. The formula divides whatever it is handed.
What NOI is used for
NOI is the property's own earnings figure, which is why it is the numerator in a cap rate and in a coverage ratio, and why lenders and appraisers ask for it rather than for rent. Build it once, honestly, and every property ratio downstream inherits it. How NOI works covers the line items in more detail. This is educational material, not financial advice.
Worked examples
\$48,000 of rent with \$9,600 of costs
A rental collects $48,000 of gross rent a year, loses $2,400 to vacancy, and spends $9,600 on operating expenses. What is the NOI?
- Effective gross income: .
- Take out operating expenses: .
Effective gross income is $45,600 and the NOI is $36,000, from $48,000 of gross rent.
A larger building with higher costs
Gross rent is $60,000, vacancy is $3,000 and operating expenses are $12,000. What is the NOI?
- Effective gross income: .
- Subtract expenses: .
NOI is $45,000 on $60,000 of gross rent, with $57,000 of effective gross income in between.
Quoting rent as if it were NOI
A listing that shows $48,000 of rent and calls it income has skipped both subtractions. The building's actual earnings here are $36,000, a quarter lower. At any cap rate that difference moves the implied value by a quarter as well.
Common questions
Does NOI include property tax?
Yes. Property tax and insurance are costs of running the building, so they sit inside operating expenses.
Why leave the mortgage out?
Because it belongs to the owner, not the property. Leaving it out is what makes two buildings comparable.
Is this financial advice?
No. It is educational material for the net operating income identity.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.