Net Operating Income (NOI) Calculator
Results:
Effective Gross Income (EGI): $0.00
Net Operating Income (NOI): $0.00
Understanding Net Operating Income (NOI)
Net Operating Income (NOI) is a crucial metric in real estate investing, representing the profitability of an income-generating property. It's calculated by taking the total revenue generated by the property and subtracting all necessary operating expenses. NOI does not include financing costs (like mortgage payments) or capital expenditures (like major renovations).
Key Components:
- Potential Gross Income (PGI): This is the maximum rental income a property could generate if it were 100% occupied and all tenants paid on time. It includes rent, parking fees, laundry income, etc.
- Vacancy & Credit Loss: This accounts for the income lost due to periods when a unit is empty or when a tenant fails to pay rent. It's often expressed as a percentage of PGI.
- Effective Gross Income (EGI): This is the PGI minus vacancy and credit loss, plus any other income the property generates. EGI represents the realistic total income you can expect from the property.
- Operating Expenses: These are the costs associated with running and maintaining the property. Common operating expenses include property taxes, insurance, property management fees, repairs and maintenance, utilities (if not paid by tenants), and administrative costs. Importantly, operating expenses do not include mortgage principal and interest payments, depreciation, amortization, capital expenditures, or income taxes.
Why is NOI Important?
NOI is a fundamental indicator of a property's ability to generate cash flow. Investors use NOI to:
- Assess Profitability: A higher NOI indicates a more profitable property.
- Compare Properties: NOI allows for apples-to-apples comparisons between different investment opportunities, regardless of their financing structures.
- Determine Property Value: The capitalization rate (Cap Rate), derived from NOI (NOI / Property Value), is a common method for valuing income properties.
- Secure Financing: Lenders often look at NOI to gauge a property's debt service coverage ratio.
How to Calculate NOI:
The calculation involves a few steps:
- Calculate Effective Gross Income (EGI): Start with Potential Gross Income, subtract Vacancy & Credit Loss, and add any Other Income.
- Calculate Net Operating Income (NOI): Subtract Total Operating Expenses from the Effective Gross Income.
Example:
Let's consider a small apartment building:
- Potential Gross Income: $120,000
- Vacancy & Credit Loss: 5%
- Other Income (e.g., parking fees): $5,000
- Total Operating Expenses (taxes, insurance, management, repairs): $40,000
Calculation:
- Vacancy Loss Amount = $120,000 * 0.05 = $6,000
- Effective Gross Income (EGI) = $120,000 – $6,000 + $5,000 = $119,000
- Net Operating Income (NOI) = $119,000 – $40,000 = $79,000
In this example, the Net Operating Income for the property is $79,000.