How to calculate Net Operating Income (NOI) for a rental property
What is net operating income (NOI)?
Net operating income, or NOI, is simply the net profit (rental income - total expenses) that one can expect to earn from their rental property. Where things can get confusing (when first hearing all of these terms) is that this sounds a lot like 'net cash flow' or 'net operating income'; that's because it is very similar! The key difference in the context of real estate between net operating income (NOI) and net cash flow is that NOI assumes no mortgage / loan was taken out to purchase the property. The reason this metric is commonly used in real estate is because it's a key component of calculating a property's cap rate (which you can read about here).
Below we'll walk through how to calculate NOI for a rental property, walking you through an example scenario.
How to calculate net operating income (NOI) for a rental property
The formula for net operating income (NOI) is:
NOI = total rental income - total monthly expenses
where these expenses do not include a loan payment
Suppose we purchase a single family home for $100,000 outright and rent it out to a long-term tenant. As such, the net operating income would simply be calculated as:
- Rental income: $1,400
Total monthly income: $1,400
- Property tax: $55
- Property insurance: $55
- Property management: $170.38 // Here I'm assuming ~12% of my monthly rental income
- Vacancy assumption: $70 // 5% of monthly rental income
- Maintenance / repairs (including one-off CapEx): $140 // Assuming ~10% of monthly rental income
Total monthly expenses: $490.38
So, our net operating income (NOI) is:
NOI = $1,400 - $490.38 = $909.62
What is considered a good net operating income for a rental property?
Typically, net operating income (NOI) is simply used as a variable in the cap rate calculation, and not necessarily benchmarked by itself. You can read more about calculating cap rates and how NOI factors into that here.