NOI Formula: How to Calculate Net Operating Income Step by Step

The NOI formula is short:

NOI = effective gross income - operating expenses

Where effective gross income is gross scheduled income minus vacancy and credit loss. The whole calculation takes five steps, and the calculator runs all of them and shows every intermediate line. Here is each step, then three worked examples and the mistakes that show up most often.

Step 1: gross scheduled income

Add up the monthly rent for every unit at full occupancy and multiply by twelve. Then add other income: parking, laundry, storage, pet rent, late fees, utility reimbursements from tenants. This is gross scheduled income, sometimes called gross potential rent.

Use the rent the property actually commands. For an occupied unit, that is the lease. For a vacant one, use market rent backed by comparable listings, not the figure on the seller’s flyer.

Step 2: vacancy and credit loss

Subtract an allowance for empty months and rent that is never collected. 5% is standard for stable single-family and small multifamily rentals. Use 8 to 10% for student housing, lower-priced units and markets with heavy turnover.

Gross scheduled income minus vacancy is effective gross income, the rent you will actually bank.

Step 3: operating expenses

Subtract everything it costs to run the property.

Expense	Typical figure
Property taxes	The bill you will pay after purchase, often higher than the seller’s
Insurance	Landlord policy plus flood, wind or earthquake where required
HOA or condo dues	Actual monthly dues times twelve
Maintenance and repairs	5 to 10% of collected income, more for older buildings
Capital reserves	5 to 10% of collected income for roof, HVAC, water heater, appliances
Property management	8 to 10% of collected income, even if you self-manage
Owner-paid utilities	Water, sewer, trash, gas, common-area electric
Other	Landscaping, snow, pest control, legal, accounting, licenses, advertising

The operating expenses guide explains each line and the judgment calls behind it.

Step 4: what stays out

The mortgage. NOI is before debt service, always.

Depreciation and income tax. Those are on your tax return, not the property’s operating statement.

Capital improvements that add value: an addition, a full gut renovation, converting a garage to a unit. Those are investments. Routine replacement of worn parts is what the reserve covers.

Your own labor. If you mow the lawn yourself, the lawn still costs money to a buyer. Price it in.

Step 5: subtract

Effective gross income minus operating expenses is net operating income. Divide by twelve for a monthly figure.

Example 1: a single-family rental

A $300,000 house renting for $2,500 a month. Taxes $3,600, insurance $1,500. 5% vacancy, and 18% of collected income for maintenance, reserves and management.

Line	Amount
Gross scheduled income	$30,000
Vacancy at 5%	($1,500)
Effective gross income	$28,500
Taxes	($3,600)
Insurance	($1,500)
Maintenance, reserves, management at 18%	($5,130)
Total operating expenses	($10,230)
Net operating income	$18,270

Monthly NOI is $1,522.50. The expense ratio is 35.9%. On $300,000 that is a 6.09% cap rate, and at a 6.5% market cap rate the NOI is worth $281,077. The $300k price page shows how this changes with different rent and tax figures.

Example 2: a fourplex with owner-paid water

Four units at $1,150 each, plus $80 a month in laundry income. Taxes $6,800, insurance $3,200, water and trash $340 a month. 7% vacancy. Repairs 8%, reserves 6%, management 8%.

Line	Amount
Gross scheduled income (rent $55,200 + laundry $960)	$56,160
Vacancy at 7%	($3,931)
Effective gross income	$52,229
Taxes	($6,800)
Insurance	($3,200)
Water and trash	($4,080)
Repairs, reserves, management at 22%	($11,490)
Total operating expenses	($25,570)
Net operating income	$26,659

Expense ratio 49%, which is normal for an older fourplex where the owner pays water. NOI per unit is about $6,665. The $25k NOI page shows what an NOI in this range supports at each cap rate.

Example 3: the seller’s version of example 2

Now the listing’s pro forma for the same fourplex. Rent at $1,250 per unit “market.” No vacancy line. No management, because the seller manages it. Reserves omitted. Last year’s tax bill of $5,100, before the county reassesses on sale.

Line	Amount
Gross scheduled income	$60,960
Vacancy	$0
Taxes	($5,100)
Insurance	($3,200)
Water and trash	($4,080)
Repairs at 8%	($4,877)
Net operating income	$43,703

Same building, $17,000 more NOI. At a 7% cap rate that is a $243,000 difference in what the income appears to justify. None of the items is a lie on its own. Together they turn a 7% cap rate deal into a 4.3% one. Always rebuild the statement from your own inputs.

Where NOI goes next

Cap rate. NOI divided by price. Rearranged, price is NOI divided by the market cap rate, which is how the NOI and cap rate guide turns an income statement into a value.

Debt coverage. Lenders divide NOI by the annual loan payment and want 1.20 to 1.25 or more. The fourplex’s $26,659 supports about $21,300 of annual debt service at 1.25, and the DSCR Loan Calculator will show what loan that carries at a given rate.

Cash flow. NOI minus debt service. The NOI vs cash flow guide explains why two buyers of the same property end up with different numbers here.

Common errors

Using gross rent as NOI. A “cap rate” computed on gross rent is really the inverse of the gross rent multiplier and runs two to three times too high.

Applying percentages to scheduled rent instead of collected rent. Management and repairs are billed on what comes in. Small difference on one property, meaningful across a portfolio.

Using the seller’s tax bill. Many counties reassess at sale. Look up the rule and the current millage rate, then compute the bill on your purchase price.

Skipping management because you will do it yourself. The next buyer and the appraiser will include it, so your NOI overstates what the property is worth by 8 to 10% of collected income.

Counting a tenant’s utility payment as income and also as an expense. If the tenant pays the electric bill directly, it is neither. If you pay it and bill them back, it is both, and the two should roughly cancel.

Mixing years. Trailing twelve months of rent with next year’s tax increase, or this year’s insurance quote with rents from before the last raise. Pick one period and build the whole statement on it.