How this NOI calculator works
Net operating income is the number every other rental metric is built on. Cap rate divides it by price. A commercial lender divides it by the loan payment to get debt service coverage. An appraiser capitalizes it to reach a value. Get NOI wrong and every figure downstream is wrong with it.
The calculator builds NOI the way an appraiser or lender would. Scheduled rent and other income is potential gross income; less a vacancy allowance, it is effective gross income. Property taxes, insurance, HOA dues, owner-paid utilities, maintenance, capital reserves and management come off next. What remains is NOI. Price is optional: add it and the calculator also returns the cap rate and the gap between the price and what the NOI supports.
The NOI formula
NOI = effective gross income - operating expenses
Effective gross income = (rent + other income) - vacancy and credit loss
Using the default property above: rent of $2,500 is $30,000 a year. After 5% vacancy, effective gross income is $28,500. Taxes of $3,600, insurance of $1,500 and 18% of collected income for maintenance, reserves and management bring operating expenses to $10,230. That is an expense ratio of 35.9%.
Net operating income is $18,270 a year, or $1,523 a month. On a $300,000 price that is a 6.09% cap rate. At a 6.5% market cap rate the same NOI supports a value of $281,077, so the property is priced about $18,923 above what a 6.5% buyer would pay.
Nothing about a loan appears in that calculation. The formula guide walks through every line with more examples, and the operating expense guide covers what belongs in the expense list and what does not.
NOI, EBIT and EBITDA
NOI is the real estate version of a corporate operating profit. Wikipedia sends "net operating income" to earnings before interest and taxes, and the two measures agree on the big idea: profit from operations, before the cost of financing and before income tax. They part ways on depreciation. EBIT deducts it. NOI does not, because depreciation is a tax figure, not a cost of running the building.
That makes EBITDA the closer match. Both add depreciation back, both stop before interest, and both draw the same objection: neither counts the capital spending needed to keep the asset in service. The capital reserve line in this calculator is the real estate answer to that objection.
What belongs in operating expenses
| Included in NOI | Excluded from NOI |
|---|---|
| Property taxes, at the rate you will pay after purchase | Mortgage principal and interest |
| Insurance, including flood or wind where required | Depreciation |
| HOA or condo dues | Income taxes |
| Utilities the owner pays, trash, common-area electric | Capital improvements that add value, such as an addition |
| Maintenance and repairs | Closing costs and loan fees |
| Capital reserves for roof, HVAC, water heater | Owner's personal expenses and draw |
| Management, leasing, advertising, legal, licenses | Tenant-paid utilities |
The most common mistake is a listing pro forma that leaves out vacancy, management and reserves. Those three lines are about 17% of scheduled rent on a typical property, which is the difference between a 6.1% cap rate and one over 7%.
Reading the expense ratio
Operating expenses divided by effective gross income is the expense ratio, and it is the fastest check on whether an NOI is honest.
| Expense ratio | Read as | Where you tend to see it |
|---|---|---|
| Under 30% | Lean | Newer single-family rentals in low-tax states, tenant pays all utilities. Or a statement missing management and reserves. |
| 30 to 45% | Typical | Most single-family and small multifamily rentals with every line counted. |
| 45 to 60% | Heavy | Older buildings, owner-paid heat and water, high-tax states, larger multifamily with staff. |
| Over 60% | Very heavy | Rent far below market, deferred maintenance catching up, or a cost that should be billed back to tenants. |
The expense ratio guide covers what drives it and why the 50% rule is a screen, not an answer.
NOI is what sets the value
Value equals NOI divided by the market cap rate. That is the income approach to appraisal in one line. At a 6.5% cap rate, every $1,000 of annual NOI is worth $15,385. At 5% it is worth $20,000. At 8% it is $12,500. A $50 a month rent increase or a $600 a year insurance saving is therefore worth roughly $8,769 of value at 6.5%, which is why owners of income property work so hard on lines that look small on the statement.
Every NOI from $10,000 to $250,000 has its own page showing what it is worth at each cap rate and the rent it takes to produce it. Start with what $25,000 of NOI means, or read how NOI and cap rate set a property's value.
What NOI leaves out
Financing. Two buyers can pay the same price for the same NOI and end up with very different cash flow, because cash flow is NOI minus the loan payment. NOI vs cash flow explains the split and where debt service coverage fits.
Capital condition. A property that needs a roof next year and one that had a roof last year can show the same NOI. The reserve line helps, but only an inspection tells you which one you are buying.
Growth. NOI is a snapshot of one year. A property with below-market rent and a lease ending soon has a bigger NOI coming than the statement shows, and the guide to increasing NOI goes through the levers in order of how much value each one adds.