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 helps you compare properties without changing the result for different loan terms.
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. Capital reserves for major replacements are separate. A roof replacement and a routine repair have different roles in the analysis.
A worked example
The calculator'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. The calculator includes reserves in cash flow and keeps them separate from NOI.
NOI does not assume that you bought the property with cash. It leaves financing out of this particular metric. Divide annual NOI by purchase price to calculate cap rate.
Open the free calculator and try these figures
Illustrative example. Dollar figures are rounded for display; calculations use unrounded amounts.