Net Operating Income (NOI) Calculator
Key Takeaways
- Net Operating Income (NOI) estimates a rental property’s profitability by subtracting annual operating expenses from gross operating income.
- NOI is useful during the deal analysis stage when investors are comparing multiple potential rental property investments.
- The NOI calculation excludes mortgage payments, income taxes, capital expenditures, appreciation, and other costs that fall outside regular property operations.
- By using REI Grove’s NOI calculator, you can compare rental properties clearly and make informed decisions about which opportunities best fit your business goals.
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:
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:
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.
NOI Formula at a Glance
| NOI Component | What It Means | Formula or Example |
|---|---|---|
| Net Operating Income (NOI) | A property’s income after regular operating expenses are subtracted. | NOI = GOI - Annual Operating Expenses |
| Gross Operating Income (GOI) | Estimated annual rental income after accounting for vacancy loss. | GOI = Annual Potential Rental Income - Annual Vacancy Loss |
| Annual Potential Rental Income | Estimated annual income if the unit stays occupied and tenants make all payments. | Rent, pet rent, fees, utilities, parking fees, and other property income |
| Annual Vacancy Loss | Estimated income lost when the unit sits vacant. | Number of vacant days or weeks multiplied by the rent lost during that time |
| Annual Operating Expenses | Regular costs required to operate the rental property. | Insurance, taxes, maintenance, management, advertising, legal, HOA fees, and more |
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 REI Grove’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:
- Annual potential income
- Annual vacancy loss
- 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
NOI Calculator Inputs at a Glance
| Input | What to Include | Notes |
|---|---|---|
| Annual potential income | Rent, pet rent, nonrefundable deposits, utilities, parking fees, and any other income received for the use and/or occupation of the property. | Estimate the total income the property could generate in one year if occupied year-round. |
| Annual vacancy loss | Estimated rent lost while the unit sits vacant. | Multiply the expected vacancy period by the rent lost during that period. |
| Annual operating expenses | Property management fees, advertising, insurance, taxes, cleaning, maintenance, supplies, travel, legal fees, HOA fees, and utilities you cover. | Include regular operating costs tied to day-to-day property operations. |
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.
NOI Calculator Output at a Glance
| Output | What It Shows |
|---|---|
| Net Operating Income (NOI) | The estimated profit from a property after gross operating income and annual operating expenses are calculated. |
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, as Investopedia notes. 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.
NOI Limitations to Remember
| Limitation | Why It Matters |
|---|---|
| No objective “good” or “bad” NOI | NOI only makes sense when compared with your business goals and other potential properties. |
| Major renovations are excluded | Large capital expenditures can affect actual profitability, but they do not belong in the standard NOI calculation. |
| Mortgage payments are excluded | NOI focuses on property operations, not financing structure. |
| Market changes can affect results | Rent, vacancy, expenses, and demand can shift over time. |
| NOI should not stand alone | Investors should compare NOI 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. REI Grove’s NOI real estate calculator can help you accurately compare properties of interest and grow your rental business.
FAQs
What is NOI in real estate?
Net Operating Income (NOI) is a metric that estimates the profitability of a rental property by subtracting annual operating expenses from gross operating income.
How do you calculate NOI?
The net operating income formula is NOI = Gross Operating Income (GOI) - Annual Operating Expenses. Gross Operating Income is calculated by subtracting annual vacancy loss from annual potential rental income.
What inputs do I need for an NOI calculator?
You need annual potential income, annual vacancy loss, and annual operating expenses.
What counts as annual potential income?
Annual potential income includes rent, pet rent, nonrefundable deposits, utilities, parking fees, and any other income received for the use and/or occupation of a property.
What expenses should I include in NOI?
NOI should include regular operating expenses, such as property management fees, advertising and listing fees, landlord insurance premiums, property taxes, and other fees you cover.
What expenses should I exclude from NOI?
Exclude federal income taxes, real estate examination fees, capital expenditures, government fines, mortgage principal and interest payments, and the property's purchase price.
What is a good NOI?
There is no objective “good” or “bad” NOI. The number depends on your business goals, your needs, and how the property compares with other potential investments.
Does NOI include mortgage payments?
No, NOI does not include mortgage principal or interest payments because it measures property operations rather than financing structure.
Should investors only use NOI to evaluate a property?
No, investors should not rely on NOI alone. NOI is useful, but investors should also consider other metrics, such as ROI, gross rent multiplier, and capitalization rate.