How NOI is built
Net operating income (NOI) is a property's income after operating costs but before mortgage payments and income tax. You start with potential rent — the rent if every unit were full all year — then subtract a vacancy allowance for empty periods and add any other income such as parking, laundry or pet fees to reach effective gross income (EGI). From EGI you subtract operating expenses: property taxes, insurance, management, repairs, maintenance, utilities and reserves. What remains is the NOI. It represents the pure earning power of the real estate itself, independent of how any particular buyer chooses to finance it.
Why vacancy and other income matter
Ignoring vacancy is one of the fastest ways to overstate a property's income. Even in strong markets, units sit empty between tenants, so a realistic vacancy allowance — often 5–10% depending on the market — keeps your NOI honest. On the other side, many properties earn income beyond base rent: parking spaces, coin laundry, storage, late fees or pet rent. Counting that other income gives a fuller and often more attractive picture of what the property really produces. This calculator handles both, applying your vacancy rate to potential rent and adding other income to reach effective gross income.
What belongs in operating expenses
Operating expenses are the recurring costs of running the property: property taxes, insurance, property management, routine repairs and maintenance, landscaping, utilities the owner pays, and a reserve for larger periodic costs. What does not belong are the mortgage principal and interest, income taxes, depreciation and one-off capital improvements like a new roof — those sit outside NOI by definition, which is exactly what makes NOI comparable across buyers with different loans. The expense ratio this calculator shows, expenses divided by effective gross income, is a quick check: many stabilised residential properties run somewhere around 35–50%.
What NOI feeds into
NOI is the foundation of real-estate valuation. Divide it by price to get the cap rate; divide it by annual debt service to get the DSCR a lender cares about; capitalise it at a market cap rate to estimate value. Because it excludes financing, NOI lets everyone compare the same property on equal terms. Get the NOI right and the metrics built on it are trustworthy; get it wrong and every downstream number is off. These tools use standard, published real-estate formulas and the figures you enter. They are estimates for planning and comparison, not financial, investment or tax advice — run your own numbers and speak to a qualified professional before you buy.
Frequently asked questions
How do you calculate NOI?
NOI = effective gross income − operating expenses, where effective gross income = potential rent × (1 − vacancy%) + other income. It excludes mortgage payments, income tax and capital improvements.
Does NOI include the mortgage?
No. NOI is calculated before financing so that properties can be compared regardless of how each buyer funds them. Your loan is accounted for later, in DSCR and cash-on-cash return.
What is a good expense ratio?
Many stabilised residential rentals run an expense ratio of about 35–50% of effective gross income. Much lower may mean expenses are understated; much higher may signal an inefficient or costly property.
What's the difference between potential rent and effective gross income?
Potential rent assumes full occupancy all year. Effective gross income subtracts a vacancy allowance and adds other income, so it reflects the rent you realistically collect.