Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Net operating income is calculated before any debt service or income tax touches the property, on purpose, which is exactly what makes it useful for comparing two properties financed completely differently. Mixing debt payments into NOI would make the operating performance of the property itself impossible to separate from how any particular buyer chose to finance it.
Before you rely on it
What to check
Confirm debt service and income tax are genuinely excluded from the expense figures used, since including either one defeats the purpose of an operating-performance measure meant to be financing-neutral.
The common error
Where people go wrong with net operating income calculator
Including mortgage payments in the expense side of an NOI calculation. That folds a financing decision into an operating-performance metric that's specifically meant to stand apart from how the property happens to be financed.
Sensitivity evidence
How annual gross operating income changes the net operating income
| Annual gross operating income | Net operating income | Operating expense ratio |
|---|---|---|
| $48,000 | $27,600 | 39.5% |
| $54,000 | $33,300 | 35.1% |
| $60,000worked example | $39,000 | 31.6% |
| $66,000 | $44,700 | 28.7% |
| $72,000 | $50,400 | 26.3% |
Every input, tested
Which input moves the net operating income most
| Input | Tested from | To | Net operating income at each end | Swing |
|---|---|---|---|---|
| Annual gross operating income | $54,000 | $66,000 | $33,300 to $44,700 | $11,400 (29%) |
| Annual operating expenses | $16,200 | $19,800 | $40,800 to $37,200 | $3,600 (9.2%) |
| Vacancy and credit loss | 4.0% | 6.0% | $39,600 to $38,400 | $1,200 (3.1%) |
Two variables at once
Net operating income by annual gross operating income and vacancy and credit loss
| Annual gross operating income \ Vacancy and credit loss | 3.0% | 5.0% | 7.0% |
|---|---|---|---|
| $48,000 | $28,560 | $27,600 | $26,640 |
| $54,000 | $34,380 | $33,300 | $32,220 |
| $60,000 | $40,200 | $39,000 | $37,800 |
| $66,000 | $46,020 | $44,700 | $43,380 |
| $72,000 | $51,840 | $50,400 | $48,960 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Annual gross operating income | $60,000 |
| Vacancy and credit loss | 5.0% |
| Annual operating expenses | $18,000 |
| Net operating income | $39,000 |
| Operating expense ratio | 31.6% |
Where the inputs come from
Annual gross operating income includes rent and other income such as parking, laundry and fees. Vacancy and credit loss is the share of potential income you expect to lose, and operating expenses cover property taxes, insurance, maintenance, management, utilities, supplies and reserves, but not mortgage payments, depreciation or income tax. Use the property's actual trailing twelve months where possible and verify them with bank records.
Using the net operating income in a real decision
Raising NOI by $1,000 raises value by $1,000 divided by the cap rate.
When the result stops applying
NOI depends on the accuracy of expenses, which sellers sometimes leave out or understate, and on whether management and reserves are included. It ignores capital improvements and financing. Properties with rent below market or high vacancy have a current NOI that differs from stabilized NOI. NOI is not cash flow.
What to compare it with
Turn NOI into value with the cap rate calculator, and check loan coverage with the DSCR page. The rental cash flow calculator subtracts the mortgage, and the vacancy loss and property management fee pages fine-tune inputs. Compare the expense ratio with similar properties.
People also ask
Frequently asked questions
What is included in operating expenses?
Property taxes, insurance, repairs and maintenance, management fees, utilities and supplies. Mortgage payments, depreciation and income taxes are not operating expenses.
How is NOI used to value a property?
Divide NOI by the market cap rate. A property with $39,000 of NOI at a 6.5% cap rate is worth about $600,000.
Is NOI the same as cash flow?
No. Cash flow subtracts the mortgage payment and capital spending from income, and NOI leaves both of them out.