Net Operating Income (NOI)

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Net operating income (NOI) is used to measure how much cash flow a property makes. To calculate net operating income, you subtract operating expenses from the property’s operating revenue. In other words, NOI is the amount of money that a rental property makes after subtracting the costs to operate the property.

Inputs
Operating Income
$
$
Avg. Vacant Months in a Year
%
=
Months
Operating Expenses
$
$
$
$
$
$
Results
Total Operating Income
$10,000
Total Operating Expenses
$5,000
Net Operating Income
$5,000

Net Operating Income (NOI) Index for New York

NOI 1-Year Change
-14.53%
NOI 5-Year Change
-10.8%
NOI 10-Year Change
8.47%
NOI Index
Mortgage Rate
Cap Rate Index
Price Index
Definitions
Cap Rate Index:
The capitalization rate of an average multi-family property relative to a benchmark of 100 set in the year 2000
Mortgage Rate:
The average mortgage rate across the US
Price Index:
The prices of multi-family property units relative to a benchmark of 100 set in the year 2000
NOI Index:
The net operating income (rental income minus operating expenses) of an average multi-family property relative to a benchmark of 100 set in the year 2000

Net Operating Income (NOI) Formula

Operating Income

Operating income for real estate properties would be potential rental income and other income generated subtracted by any vacancy or credit losses.

Potential rental income is the maximum amount that you would collect in rent if your property is fully occupied at all times. If you charge a commercial tenant $2,000 per month in rent, your potential rental income would be $24,000 a year.

This amount is then adjusted for any vacancy or credit losses. Vacancy losses is the amount of rental income that you miss out on when your rental units are not occupied. If your unit is only occupied 10 months in a year and it is vacant for 2 months, your vacancy losses for the year would be $4,000 (from $2,000 loss rent per month). This vacancy period might be due to downtime between tenants moving in and out.

Credit losses happen when a tenant doesn’t pay their rent. Similar to vacancy losses, you are not earning any rental income during the time that a tenant doesn’t pay rent, even if they are still occupying your unit. You will need to evict the tenant, which will take time. Credit losses accounts for the loss rental income during the time it takes to evict the tenant.

Operating income also includes other income generated by your property besides rental income. This other income might include revenue made from parking fees, vending machines, or laundry services.

Operating Expenses

Operating expenses are the costs associated with the daily operations of the property. This is the amount of money that you need to spend in order to earn your operating income. Operating expenses include property tax, maintenance and repairs, property insurance, utilities, and management fees.

What is not included in operating expenses?

Operating expenses do not include costs that are not required to operate the property. For example, you do not need to have a mortgage to operate the property, but you do need to pay property taxes at the bare minimum.

When calculating NOI, do not include mortgage interest, mortgage payments, any income taxes, depreciation, or large capital expenditures that aren’t conducted regularly.

What is NOI in real estate?

NOI is used by real estate investors to quickly see how much income a property would make. NOI doesn’t include costs that can vary from investor to investor, such as mortgage rates, which allows for a more objective view when looking for real estate or rental properties.

However, NOI does not give investors the bigger picture when comparing rental properties. You might be told that a rental property has an annual NOI of $50,000. On its own, net operating income doesn’t tell you much besides that the property is profitable due to a positive NOI, and that it’s annual cash flow is $50,000.

To find out if this rental property would be a worthwhile investment, you would want to consider the price of the property. If the property costs $100,000 and it has an annual NOI of $50,000, the property might be a great investment. If the property costs $50 million for an annual NOI of $50,000, then it might be less desirable. Similar to return on investment (ROI), you need to take the amount of capital required into account, not just how much your investment will make.

Net operating income is used to calculate the capitalization rate, which is the property’s net operating income divided by the property’s cost or market value. This provides a percentage, called the cap rate, that can be used to easily compare between real estate properties with different prices and NOI. To find your property’s cap rate, view average cap rates in the U.S. and to see cap rate payback periods, visit our cap rate calculator.

For an even more comprehensive view which calculates ROI and the cap rate by taking into account mortgages costs, property prices, and closing costs, visit our rental property calculator.

Any calculators or content on this page is provided for general information purposes only. Casaplorer does not guarantee the accuracy of information shown and is not responsible for any consequences of its use.