How to Calculate NOI (With a Full Example)

Net operating income is the number every other rental metric depends on. Cap rate divides by it, DSCR divides by debt service to compare against it, and cash flow is what remains after debt and reserves. Getting it wrong makes every downstream number wrong in the same direction.

This guide works through one property completely. The cap rate calculator and the rental cash flow calculator apply the same conventions to your own inputs.

The formula

Gross potential rent = Scheduled rent + Other income
Effective gross income = Gross potential rent − Vacancy loss
NOI = Effective gross income − Operating expenses

Three definitions matter more than the arithmetic:

1. Gross potential rent is rent at full occupancy, before any vacancy allowance.
2. Vacancy loss is a percentage of gross potential rent, covering both empty months and uncollected rent.
3. Operating expenses are the costs of running the property, excluding debt service, capex, depreciation and income tax.

A four-unit example

Take a four-plex priced at $420,000. Each unit rents for $1,200 a month, laundry brings in $100 a month, and the buyer assumes 6% vacancy, 8% management, 7% maintenance, $2,400 of insurance, $5,600 of property tax and $300 a month of owner-paid utilities.

Line	Annual
Scheduled rent (4 × $1,200 × 12)	$57,600
Other income (laundry)	$1,200
Gross potential rent	$58,800
Vacancy at 6%	−$3,528
Effective gross income	$55,272
Management at 8% of GPR	−$4,704
Maintenance at 7% of GPR	−$4,116
Insurance	−$2,400
Property tax	−$5,600
Utilities	−$3,600
Operating expenses	−$20,420
Net operating income	$34,852

At the $420,000 price, the cap rate is 8.30%. That is the property-level yield before any loan exists.

What belongs in NOI

Included	Excluded
Management fee	Mortgage principal and interest
Maintenance and repairs	Capital expenditure (roof, HVAC)
Property tax	Depreciation
Insurance	Income tax
HOA dues	Loan origination fees
Owner-paid utilities	Personal expenses of the owner
Other operating costs (lawn, pest, permits)	—

Leasing commissions are an operating cost of renting the unit, and many underwriting models include them in NOI. This site does not have a separate line for them; if you want them included, fold them into the management percentage or the other-expenses line. The important thing is to be consistent between properties you are comparing.

Why percentage expenses use gross rent

Management, maintenance and capex are calculated as a percentage of gross potential rent, not effective gross income. On this property, 8% of $58,800 is $4,704; 8% of the $55,272 effective income would be $4,422. The difference is $282 a year — small on one property, but it compounds across a portfolio and it changes the cap rate.

The convention exists because the work does not shrink when the unit is vacant. A manager still has to advertise and screen tenants; the building still needs maintenance. Basing the fee on scheduled rent keeps the expense stable and comparable.

Repairs versus capital expenditure

The line between a repair and a capital expenditure is a judgment call. A repair restores the property to working order — a leaking faucet, a broken window, a failed water heater. A capital expenditure extends its useful life or adds value — a new roof, a replaced HVAC system, a kitchen renovation.

For NOI purposes, recurring repairs are operating expenses and replacements are capex. The distinction matters because misclassifying a roof replacement as maintenance understates NOI in the year it happens and overstates it in the years before, when no reserve was set aside. Tax rules define the categories separately for their own purposes; this site only uses the distinction to keep NOI and cash flow separate.

When in doubt, treat anything that will last decades as capex and anything that will recur within a few years as maintenance.

NOI is not cash flow

NOI stops at operating expenses. Cash flow continues through debt service and capital reserves. Add a $315,000 loan at 7% over 30 years and a 6% capex reserve to the four-plex:

Line	Annual
Net operating income	$34,852
Debt service	−$25,148
Capex reserve at 6% of GPR	−$3,528
Cash flow	$6,176

The property earns $34,852 of operating income and returns $6,176 of cash after its mortgage and reserve. Both facts are true; they answer different questions. The cash flow guide shows the same bridge month by month, and the deal analyzer adds a multi-year projection on top of it.

Five ways NOI goes wrong

Using collected rent and applying vacancy. If the rent figure is what was actually collected, subtracting vacancy again double-counts the loss. Start from scheduled rent.

Omitting management because the owner self-manages. The fee is a proxy for the work. Leaving it out raises NOI and the cap rate, and makes the property look better than an identical one that pays a manager.

Leaving out utilities or HOA dues. These are easy to miss because they are not always in the listing. On the four-plex, utilities alone are $3,600 a year.

Using the seller’s pro forma. A pro forma may use market rent, a renovated unit mix, or an expense ratio from a different property. Use in-place numbers or state clearly that you are using a stabilised projection.

Mixing price conventions. Some sellers quote a cap rate on the contract price, others on price plus closing costs. Recompute from the same basis before comparing.

Why lenders use NOI before capex

DSCR lenders divide NOI by debt service, and the NOI in that ratio excludes capex reserves. That is why this site shows a lender-basis DSCR and a stress DSCR: the first matches how a loan file is underwritten, the second shows what coverage looks like after the building gets its reserve money. Neither is a qualification decision, and the DSCR guide explains the difference.

The practical rule

When you compute NOI for a real property, ask three questions:

1. Is the rent scheduled rent at full occupancy, or collected rent?
2. Are management, maintenance and capex based on gross potential rent?
3. Is every cost of operating the building included — tax, insurance, HOA, utilities, and the small stuff?

If the answer to all three is yes, the number is comparable with anything else computed the same way. If not, it is only comparable with itself.

Sources

• Appraisal Institute — professional standards and the income approach to value
• Consumer Financial Protection Bureau — Closing disclosure explainer