Calculate the profitability of an investment property.
Enter values to see your NOI
Understanding Net Operating Income (NOI)
Net Operating Income (NOI) is a crucial metric in real estate investing. It represents the profitability of an income-generating property before accounting for debt service (mortgage payments) and income taxes. Essentially, it tells you how much money the property is making on its own, independent of how it's financed or your personal tax situation.
NOI is a key indicator for property valuation, comparing investment opportunities, and assessing a property's ability to generate cash flow to cover its expenses and potentially pay down debt.
How to Calculate NOI
The formula for NOI is straightforward:
NOI = (Potential Gross Income + Other Income) – Vacancy & Credit Loss – Operating Expenses
Let's break down the components:
Potential Gross Income (PGI): This is the total rental income a property could generate if it were 100% occupied with no vacancies and tenants paid all rent on time. It's calculated by multiplying the total potential rent per unit by the number of units, or by summing up the potential rent from all sources.
Vacancy & Credit Loss: This accounts for periods when units are vacant (and therefore not generating rent) and for any rent that tenants fail to pay (credit loss). This is usually estimated as a percentage of the PGI.
Other Income: This includes any revenue generated by the property besides rent, such as laundry facilities, parking fees, vending machines, or late fees.
Operating Expenses: These are the costs associated with running and maintaining the property. Importantly, operating expenses do NOT include mortgage principal and interest payments, depreciation, amortization, capital expenditures (major improvements like a new roof or HVAC system), or income taxes. Common operating expenses include:
Property Taxes
Property Management Fees
Insurance
Utilities (if paid by the owner)
Repairs and Maintenance
Janitorial and Landscaping Costs
Administrative Costs
Example Calculation
Consider a small apartment building with the following financial data for a year:
Potential Gross Income: $120,000
Vacancy & Credit Loss: $6,000 (This represents 5% of PGI)
NOI = ($120,000 + $1,500) – $6,000 – $45,000
NOI = $121,500 – $6,000 – $45,000 NOI = $70,500
This means the property generated $70,500 in income before mortgage payments, capital expenditures, and income taxes.
Why is NOI Important?
Property Valuation: The capitalization rate (Cap Rate), another key metric, is calculated using NOI (Cap Rate = NOI / Property Value). This allows investors to estimate a property's value based on its income.
Investment Comparison: NOI helps investors compare the performance of different properties, regardless of their financing structures.
Lending Decisions: Lenders often use NOI to assess a property's ability to service debt. The Debt Service Coverage Ratio (DSCR), calculated as NOI / Annual Debt Service, is a common lending requirement.
Performance Tracking: Regularly calculating NOI allows property owners to track performance over time and identify areas where expenses might be too high or income could be increased.
A higher NOI generally indicates a more profitable and valuable property.
function calculateNOI() {
var potentialGrossIncome = parseFloat(document.getElementById("potentialGrossIncome").value);
var vacancyAndCreditLoss = parseFloat(document.getElementById("vacancyAndCreditLoss").value);
var otherIncome = parseFloat(document.getElementById("otherIncome").value);
var operatingExpenses = parseFloat(document.getElementById("operatingExpenses").value);
var resultElement = document.getElementById("result");
if (isNaN(potentialGrossIncome) || isNaN(vacancyAndCreditLoss) || isNaN(otherIncome) || isNaN(operatingExpenses)) {
resultElement.innerHTML = "Please enter valid numbers for all fields.";
resultElement.style.color = "#dc3545"; // Red for error
return;
}
if (potentialGrossIncome < 0 || vacancyAndCreditLoss < 0 || otherIncome < 0 || operatingExpenses < 0) {
resultElement.innerHTML = "Values cannot be negative.";
resultElement.style.color = "#dc3545"; // Red for error
return;
}
var grossIncome = potentialGrossIncome + otherIncome;
var noi = grossIncome – vacancyAndCreditLoss – operatingExpenses;
// Ensure NOI is not negative if expenses exceed income
// While technically NOI can be negative, for display we might want to show it as 0 if it's a loss scenario,
// or just display the negative value clearly. Here we display the actual calculated value.
// For a more common scenario where expenses are expected to be less than income:
// if (noi < 0) {
// noi = 0; // or handle as a loss indication
// }
resultElement.innerHTML = "$" + noi.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 });
resultElement.style.color = "#28a745"; // Green for success
}