NOI Calculator

What Is Net Operating Income?

NOI, short for net operating income, is a metric that represents the profitability of a commercial property. The calculation is simply the subtraction of all operating expenses from the property’s total income.

In order to get an accurate determination of the total income of a property, various revenue sources such as tenant rents, parking fees, coin laundry machines, etc., should be factored into the calculation. In regards to operating expenses, these aren’t just maintenance fees, but everything from insurance to professional third-party contracts.

Net operating income is an important metric because it takes all of a property’s cash flows into consideration using one simple calculation.

Net Operating Income Formula

Total Property Income - Total Operating Expenses = NOI

How to Calculate Net Operating Income

The accuracy of an NOI calculation is wholly dependent on the right components being used in its calculation. The gross operating income, for example, should not be incorrectly rounded or estimated, as this would give a false NOI calculation. Each income-producing property is unique in its revenue-generating components and its operating expenses. Here a few areas to keep in consideration when calculating NOI.

Gross Operating Income (GOI)

A property’s gross income is not something that can be observed by simply looking at a rent roll. The gross operating income of an apartment property is a more intricate calculation designed to also mathematically account for fluctuations and possible outcomes regarding a property’s income. The formula for gross operating income is:

Potential Rental Income - Vacancy Rates = Gross Operating Income

Even so, these are also figures that must be accurately calculated for the determination of GOI.

Potential Rental Income

Potential rental income (PRI) shows the amount of income an apartment owner would make if the property was 100% leased, 100% of the time.

Other Income

NOI is intended to take all income into account, which is GOI plus any additional income that a property produces. Income-producing properties can make money through various means, not just through tenant rent. Vending machines, parking fees, and even a coin-laundry setup all may provide additional income for the property owner that must be considered when calculating NOI.

Operating Expenses

The due diligence given to identifying sources of income should also be dedicated to tracking operating expenses. Income aside, an accurate NOI calculation is dependent on knowing how much it actually costs to operate a property. Some operating expenses to consider in NOI calculations are:

  • Maintenance and repair costs

  • Insurance

  • Property taxes

  • Property management

  • Miscellaneous fees, including accounting and attorney fees, marketing costs, etc.

Vacancy And Credit Losses

100% occupancy with no vacancies at any given time is extremely unlikely, so GOI factors in vacancy and credit losses in relation to potential rental income.

What Isn’t Factored Into NOI Calculations?

The NOI figure does not include items that can be written off against future earnings and taxes. It also does not include capital expenditures (or any other large one-time costs) such as major repairs. Figures such as these are excluded from NOI calculations because they typically do not matter in regards to the actual purpose of net operating income, which is to show the true cash flow of a rental property.

Debt Service

Debts are not typically included in a NOI calculation since the amount of debt can vary from investor to investor: one investor may put 50% down, while another may opt to put 20% down. These figures would greatly influence NOI if included, but — as NOI is about the overall health of the property — they should be excluded. 

Income Tax

NOI is a pre-tax calculation, therefore all taxes (excluding property taxes) must be excluded from the formula. The driving reason for this is that tax expenses may vary widely depending on the borrower and less on the property itself.

Depreciation

Depreciation isn’t an actual expense, but more so an accounting concept. As depreciation isn’t something paid out of pocket, only becoming material when writing it off on taxes or during the sale of a property, it is excluded from the calculation.

Tenant Improvements

Tenant improvements, or TI, are expenses that are specific to a tenant and not the whole property. As a result, these costs are excluded from NOI calculations.

Using NOI to Determine Cap Rate

NOI is a key factor used to help determine the cap rate of an investment. The capitalization rate is a metric used by investors to assess the profit potential of a particular investment. To calculate the cap rate of a commercial real estate investment, you would take the net operating income and divide it by the purchase price of the property. The formula to determine a cap rate is:

Capitalization Rate = NOI ÷ Purchase Price