Does NOI Include Vacancy?

Yes. Vacancy is part of the NOI calculation, but it is not an operating expense. It is subtracted from gross scheduled rent, along with credit loss, to get effective gross income. Operating expenses come off after that. A property that is full today still needs a vacancy allowance, usually 5 to 8%.

Where vacancy sits in the NOI formula

The full formula runs: gross scheduled rent, minus vacancy and credit loss, equals effective gross income. Effective gross income minus operating expenses equals NOI. Vacancy is an income adjustment above the expense lines, not one of them.

The difference matters for the operating expense ratio, which divides expenses by effective gross income. Put vacancy in the expense list and the ratio comes out too high, though NOI ends up the same.

Vacancy on a $500,000 rental

The default house has $48,000 of scheduled rent and a 5% vacancy allowance, $2,400. Effective gross income is $45,600. Because maintenance, reserves and management are percentages of collected rent, vacancy also shrinks those lines slightly.

Vacancy	Effective gross income	Operating expenses	NOI	Value at 6.5%
0%	$48,000	$17,140	$30,860	$474,769
5%	$45,600	$16,708	$28,892	$444,492
8%	$44,160	$16,449	$27,711	$426,326
10%	$43,200	$16,276	$26,924	$414,215

Why a full building still gets a vacancy allowance

Tenants leave. Even a strong single-family rental sits empty for a few weeks between leases, and two weeks a year is already about 4% of rent. Credit loss, rent that is owed and never collected, sits in the same line.

Underwriting at 0% because the property is full today adds about $2,000 to this house's NOI and about $30,000 to its apparent value. It is one of the most common gaps between a seller's pro forma and a buyer's numbers, along with skipping property management.

Typical vacancy rates

Use the local market rate when you can find it. The Census Bureau publishes a national rental vacancy rate each quarter, and it has generally run between about 5% and 8% over the past decade. Single-family rentals in tight markets can run lower, and older buildings in weak markets higher.

Run the numbers on your property

The calculator below is loaded with the $500,000 example. Change any line to see how vacancy moves NOI and value, or read the full operating expense checklist for every line that belongs above NOI.

Itemized income and expense lines

Income

Monthly rent (all units)$Scheduled rent at full occupancyUnitsFor per-unit figures. 1 for a house or condo.Other monthly income$Parking, laundry, pet rent, storage, utility billbackVacancy and credit loss%$2,400 a year. 5 to 8% is typical.

Operating expenses

Annual property taxes$Use the bill after reassessment, not the seller'sAnnual insurance$Landlord policy, plus flood or wind where neededHOA dues (monthly)$Owner-paid utilities (monthly)$Water, sewer, trash, gas, common-area electricOther monthly expenses$Lawn, snow, pest, licenses, legal, accounting

Price and market (optional)

Purchase price or value$Leave at 0 if you only need NOI. Turns on the cap rate.Market cap rate%What comparable properties sell at. Values the NOI.

Net operating income (annual)

$28,892

$2,408 a month

Typical expenses · 37% ratio

Typical. 30 to 45% of collected income covers expenses, the range most single-family and small multifamily rentals land in with every cost counted.

Income statement

Gross scheduled income: $48,000
Vacancy and credit loss: -$2,400
Effective gross income: $45,600
Property taxes: -$6,000
Insurance: -$2,500
Maintenance: -$2,280
Capital reserves: -$2,280
Management: -$3,648
Total operating expenses: -$16,708
Net operating income: $28,892
Expense ratiooperating expenses / effective gross income: 36.6%
NOI marginNOI / effective gross income: 63.4%

What this NOI is worth

Value at a 6.50% cap rate: $444,492
Cap rate at this price$28,892 / $500,000: 5.78%
Priced above that value by: $55,508
Gross rent multiplierprice / gross scheduled income: 10.4

What moves it

Each $100/mo of rent addsof annual NOI after vacancy and percentage expenses: $935
Each point of vacancy costsof annual NOI: $394
Each $1,000 of NOI is worthat a 6.50% cap rate: $15,385

Vacancy and NOI questions

Is vacancy an operating expense?

No. Vacancy is a reduction in income, taken from gross scheduled rent before operating expenses. It still lowers NOI, but it sits above the expense lines, not among them.

What vacancy rate should I use for NOI?

5 to 8% for most long-term rentals, using a local figure where one exists. Use more for an older building, a weak market or a unit that turns over often. Never use 0% just because the property is full today.

Is credit loss the same as vacancy?

They are different losses that share one line. Vacancy is rent lost while a unit is empty. Credit loss is rent from an occupied unit that is never paid. Both come off gross scheduled rent to get effective gross income.

Sources: US Census Bureau: Housing Vacancies and Homeownership