Net Operating Income (NOI) Calculator
Calculate net operating income for a rental property by subtracting vacancy losses and operating expenses from gross rental income.
Results
Visualization
How It Works
Net operating income is the most important number in real estate investing. It represents what a property earns after all operating expenses but before debt service and income taxes. Lenders, appraisers, and investors all use NOI as the primary measure of property performance.
The Formula
Variables
- Gross Rental Income — Total scheduled rent if the property were 100% occupied all year
- Vacancy Rate — Expected percentage of income lost to vacancy and credit losses
- Effective Gross Income — Gross income adjusted for vacancy — the realistic income figure
- Operating Expenses — All costs to operate the property: taxes, insurance, maintenance, management, utilities
- NOI — Income remaining after operating costs, used for valuation and debt service coverage
Worked Example
A duplex generates $30,000 in gross annual rent. With a 5% vacancy rate, effective income = $30,000 x 0.95 = $28,500. Annual operating expenses (taxes, insurance, maintenance, management) total $9,000. NOI = $28,500 - $9,000 = $19,500 per year, or $1,625 per month.
Practical Tips
- NOI never includes mortgage payments — this is the most common mistake beginners make.
- The 50% rule says expenses typically eat about half of gross rent — use it as a quick sanity check.
- Capital expenditures (roof, HVAC replacement) are not operating expenses but should be reserved for separately.
- Lenders use NOI to calculate DSCR (debt service coverage ratio) — a key metric for loan approval.
- Compare your NOI year-over-year to track whether expenses are growing faster than rent.
Frequently Asked Questions
What expenses are included in NOI?
Property taxes, insurance, maintenance, property management, utilities paid by the owner, landscaping, and pest control. NOT included: mortgage payments, depreciation, capital expenditures, or income taxes.
What is a good operating expense ratio?
For residential rental properties, 35-45% is typical. Older buildings run 45-55%. If your ratio is above 50%, look for ways to reduce expenses or increase rent.
Is NOI the same as cash flow?
No. Cash flow = NOI minus debt service (mortgage payments). A property can have positive NOI but negative cash flow if the mortgage payment is too high.
How do lenders use NOI?
Lenders calculate DSCR = NOI / Annual Debt Service. Most require DSCR of 1.2-1.25 or higher, meaning NOI must exceed mortgage payments by at least 20-25%.
Should I include a reserve for capital expenses?
The IRS and formal NOI calculations don't include CapEx reserves. However, smart investors set aside 5-10% of gross rent for future capital expenses (roof, HVAC, appliances). Budget for it separately.