Net Operating Income (NOI) Calculator: How to Build Your NOI Step-by-Step

Net Operating Income, or NOI, is the lifeblood of any income-producing property. It's the single most important figure for determining a property's profitability and value. Before you can calculate a cap rate, analyze cash flow, or secure financing, you need a solid understanding of how to calculate NOI. This guide will break down the NOI formula and show you how to build your own calculation from the ground up.

What is Net Operating Income (NOI)?

NOI represents a property's annual income after you've paid all of your operating expenses. Think of it as the property's profit before you account for your mortgage payments (debt service) and income taxes. It's a pure measure of how well the property itself performs as a business, regardless of who owns it or how it's financed.

What's Included in Effective Gross Income (EGI)?

Effective Gross Income is all the money the property could potentially generate, minus losses from vacancy.

• Gross Potential Rent (GPR): The total rent you would collect if the property were 100% occupied all year.
• Vacancy Loss (-): An allowance for units that are unoccupied or tenants who don't pay. This is often estimated as a percentage of GPR (e.g., 5%).
• Other Income (+): Revenue from sources other than rent, such as parking fees, laundry machines, vending, or late fees.

What's Included in Operating Expenses (OpEx)?

Operating Expenses are the day-to-day costs required to run and maintain the property. These are generally predictable and recurring.

• Property Taxes: Annual taxes levied by the local government.
• Property Insurance: Coverage for liability, fire, and other hazards.
• Utilities: Costs for water, sewer, trash, and electricity for common areas (and sometimes tenant units, depending on the lease).
• Repairs & Maintenance: Regular upkeep, landscaping, plumbing repairs, etc.
• Property Management Fees: Typically a percentage of collected rent paid to a management company.

What's NOT Included in NOI?

This is a critical distinction that often trips up new investors. The following items are "below the line" and are not considered operating expenses:

Separating these items is crucial because it allows you to analyze the property's performance independently from its financing or your personal tax situation.

Step-by-Step NOI Calculation Example

Let's use a sample 10-unit apartment building:

• Gross Potential Rent: $150,000
• Vacancy Loss (5%): $7,500
• Other Income (Laundry): $2,500
• Operating Expenses: $60,000

Step 1: Calculate Effective Gross Income (EGI).

$150,000 (GPR) - $7,500 (Vacancy) + $2,500 (Other Income) = $145,000 (EGI)

Step 2: Subtract Operating Expenses.

$145,000 (EGI) - $60,000 (OpEx) = $85,000 (NOI)

The Net Operating Income for this property is $85,000. This is the figure you would use to calculate the property's cap rate or DSCR.

Why NOI is the Foundation of CRE Analysis

NOI is the starting point for nearly every other important metric:

• Property Valuation: Investors and appraisers use NOI in the cap rate formula to determine a property's value (Value = NOI / Cap Rate). Learn more in our cap rate calculation guide.
• Loan Underwriting: Lenders use NOI to calculate the Debt Service Coverage Ratio (DSCR), which determines if the property generates enough income to cover its mortgage payments.
• Cash Flow Analysis: Your pre-tax cash flow is simply your NOI minus your total annual debt service. For analyzing multifamily properties, see our multifamily analysis guide.

An accurate NOI is non-negotiable for sound investment analysis. Always use actual historical data (like a T-12, or trailing twelve months statement) whenever possible, rather than relying on a seller's optimistic "pro-forma" projections.