Net Operating Income (NOI)

When evaluating an investment property, using rental metrics and analytics is crucial for making informed decisions. Metrics provide a clear picture of a property’s current or potential financial performance, helping investors gauge profitability and mitigate risks. Net Operating Income (NOI) is one metric that can help investors optimize their portfolios, ensuring they make the most out of their real estate ventures.  

What is NOI?  

Net Operating Income (NOI) is a metric that estimates the profitability of a potential rental property investment. It measures a property’s income after regular, monthly expenses are subtracted. NOI doesn’t account for large-scale renovations, nor does it consider the effects of appreciation, interest, or rental income taxes. Because these variables are excluded from your NOI, you’re comparing baseline income from two potential rental properties so you can make the best financial decision for your business. 

NOI Formula  

The net operating income formula is as follows: 

Net Operating Income (NOI) = Gross Operating Income (GOI) – Annual Operating Expenses

Put simply, this means that your net operating income is the sum of all your rental income minus the sum of regular, monthly expenses that come with operating the property. Your total rental income, or gross operating income, is calculated as follows: 

The formula for Gross Operating Income (GOI) is as follows: 

Gross Operating Income (GOI) = Annual Potential Rental Income − Annual Vacancy Loss 

This formula means that your gross operating income is equal to your estimated rental income for the year minus your annual vacancy loss, which is the estimated amount of rent you’ll lose if your unit sits vacant. We’ll break these terms down in further detail below. 

When to Use NOI 

The net operating income calculation is especially informative for real estate investors when used during the deal analysis stage, when you are analyzing multiple potential investments before making the best buying decision. If you’re an investor, it’s important to work the numbers to get a clear picture of which properties have the highest profitability potential and lowest financial risk before you sign. 

How to Use the NOI Calculator  

Using Innago’s NOI calculator makes it quick and easy to calculate net operating income for your property. By simply inputting your rental income, vacancy loss, and operating expenses into the calculator, you’ll instantly have the NOI for any particular investment you choose, eliminating the need for manual assessments that take time and effort away from running your business.  

Inputs  

To use the net operating income calculator, you’ll need the following inputs: 

1. Annual potential income 
2. Annual vacancy loss 
3. Annual operating expenses 

Annual potential income is an estimate of how much income you’ll generate from a real estate investment in one year, assuming that your unit is occupied year-round and that your tenants don’t default on any payments during the 12-month period. There are several forms of income that fall under this category. To find your annual potential income, simply estimate each and sum them for the year:  

• Rent 
• Pet rent 
• Nonrefundable deposits (e.g., nonrefundable pet deposits) 
• Utilities 
• Parking fees 
• Any other income you receive for the use and/or occupation of a property 

Annual vacancy loss is the amount of rental income you expect to lose due to vacancies throughout the year. To find this number, multiply the number of days or weeks you estimate your property will sit empty by the rate of rent you’d be losing (for example, an apartment at $1,500 per month that sits empty for three months will lose $4,500 due to vacancy loss). 

Annual operating expenses are the sum of all the non-variable, regular monthly expenses you expect to incur from a rental property over a year. These include: 

• Property management fees (including software fees) 
• Advertising and listing fees 
• Landlord insurance premiums 
• Property taxes
• Cleaning and maintenance fees 
• Supplies 
• Travel supplies (if you travel to your office or properties) 
• Legal fees 
• HOA fees 
• Utilities you cover 

The following are not non-variable, regular expenses involved in the day-to-day upkeep of your property, so exclude them from your total operating expenses: 

• Federal income taxes 
• Real estate examination fees 
• Capital expenditures (e.g., major renovations) 
• Government fines 
• Mortgage principal and interest payments 
• The property’s purchase price 

Output 

Once you enter your inputs, the calculator will output your property’s net operating income (NOI). This number will tell you how much profit you’ll walk away with from a property, and you can use that number to compare with other properties you’re interested in purchasing.  

How to Interpret Your NOI 

What is a good NOI?  

The results of your NOI calculations will never result in an objective “good” or “bad” NOI. Instead, the NOI result will be subjective to your business and your needs, only making sense when compared with the NOI of other potential properties. 

Think of NOI as your overall profit at the end of the day — what ends up in your hands after the expenses of maintaining and operating the property are paid. It’s a great way to assess the revenue you’ll bring in from renting one property when compared to another. 

However, as simple as it is to use, the NOI calculation must be considered in context. Since it only calculates revenue based on regular expenses and income and doesn’t account for factors like extensive renovations, evictions, and fluctuations in market rent over time, it may overestimate your NOI. To further assure accuracy, we recommend pairing our real estate NOI calculator with other metrics, such as ROI, gross rent multiplier, and capitalization rate. 

Conclusion  

NOI is a valuable metric that serves as a simple and quick evaluation you can use when choosing the better deal between two or more properties. Innago’s NOI real estate calculator can help you accurately compare properties of interest and grow your rental business.