Net Operating Income (NOI) Calculator
Net Operating Income (NOI) Result
Your Net Operating Income (NOI) will be displayed here.
Understanding Net Operating Income (NOI) in Real Estate
Net Operating Income (NOI) is a crucial metric for real estate investors. It represents the profitability of an income-generating property before accounting for debt service (mortgage payments) and income taxes. Essentially, it's the income the property produces from its operations.
What NOI Tells You:
- Property Performance: A higher NOI indicates a more profitable property.
- Investment Potential: It's a key figure used in calculating the capitalization rate (Cap Rate), another vital real estate metric.
- Comparison Tool: NOI allows investors to compare the operational efficiency of different properties, regardless of their financing structures.
Calculating NOI: The Formula
The basic formula for NOI is:
NOI = Gross Rental Income – Operating Expenses
Let's break down the components:
Gross Rental Income:
This is the total potential rental income a property could generate if it were fully occupied and all tenants paid on time. This includes base rent and any other fees collected from tenants (e.g., parking, laundry). In our calculator, we start with Annual Rental Income.
Vacancy and Credit Loss:
No property is occupied 100% of the time. Vacancy represents periods when a unit is empty between tenants. Credit loss accounts for tenants who don't pay their rent. This is usually expressed as a percentage of Gross Rental Income and is deducted to arrive at Effective Gross Income.
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, or capital expenditures (major renovations). Common operating expenses include:
- Property Taxes: Annual taxes levied by the local government.
- Insurance: Property insurance premiums.
- Property Management Fees: If a property manager is hired, their fees (often a percentage of rent collected).
- Repairs and Maintenance: Costs for routine upkeep and repairs.
- Utilities: Costs for water, sewer, electricity, gas, etc., if paid by the owner.
- Other Operating Expenses: Any other costs directly related to property operations, such as landscaping, cleaning, or administration.
Using the NOI Calculator:
Our calculator simplifies this process. Input your Annual Rental Income and then detail your expected operating expenses. The calculator will first account for vacancy and credit loss, then deduct all your operating expenses to present your Net Operating Income.
Example Calculation:
Let's consider a small apartment building:
- Annual Rental Income: $60,000
- Vacancy and Credit Loss: 5%
- Property Taxes: $7,000
- Insurance: $2,000
- Property Management Fees: 10%
- Repairs and Maintenance: $2,500
- Utilities: $3,500
- Other Operating Expenses: $1,000
Step 1: Calculate Effective Gross Income
Vacancy Loss = $60,000 * 0.05 = $3,000
Effective Gross Income = $60,000 – $3,000 = $57,000
Step 2: Calculate Total Operating Expenses
Property Taxes + Insurance + Repairs/Maintenance + Utilities + Other Expenses = $7,000 + $2,000 + $2,500 + $3,500 + $1,000 = $16,000
Property Management Fees = $57,000 * 0.10 = $5,700
Total Operating Expenses = $16,000 + $5,700 = $21,700
Step 3: Calculate NOI
NOI = Effective Gross Income – Total Operating Expenses
NOI = $57,000 – $21,700 = $35,300
This calculated NOI of $35,300 is the net income generated by the property before considering any financing costs or income taxes. This figure is then used to evaluate the property's investment potential, often by comparing it to its market value using the Cap Rate.