How to calculate net operating income (NOI)
Net operating income measures a property's rental income after vacancy and operating expenses, before mortgage payments, capital expenses and income tax. It measures property operations independently of financing.
The formula
Annual NOI = annual rent − vacancy allowance − annual operating expenses.
Operating expenses include property management, routine maintenance, property taxes, insurance and any utilities or HOA fees you pay. Keep reserves for major replacements separate from operating expenses.
A worked example
The analyzer's example property costs $150,000 and rents for $2,000 a month. Its monthly operating figures are:
- Scheduled rent: $2,000
- Vacancy allowance: $100
- Management: $200
- Routine maintenance: $200
- Insurance: $100
- Property taxes: $150
Monthly NOI = $2,000 − $100 − $200 − $200 − $100 − $150 = $1,250.
Annual NOI is $1,250 × 12 = $15,000.
To compare NOI with a loan payment, use the rental property DSCR calculator. It shows both operating coverage and the rent-to-PITIA ratio used in some residential loan analyses.
NOI versus cash flow
The same example sets aside another $200 a month for capital expenses and pays $786.62 in mortgage principal and interest. Cash flow after those amounts is $263.38 per month. Reserves reduce cash flow but do not reduce NOI.
NOI excludes financing. Divide annual NOI by purchase price to calculate cap rate.
Try these figures in the property analyzer
Example figures are rounded; calculations use full precision.