Guide
How to calculate NOI
Team RE Underwrite Lab
NOI before the loan
Net operating income is the rent you expect to collect after vacancy, minus the operating expenses you count, and before the mortgage. Cap rate divides that figure by price. If the mortgage is still inside the expenses, the cap rate is no longer the ratio people mean.
The cap rate calculator asks you to type NOI as one number. This guide shows a way to build that number. It does not pull a rent roll.
Formula
Gross rent = monthly rent × 12. Vacancy loss = gross rent × vacancy percent. Effective rent = gross rent − vacancy loss. NOI = effective rent − taxes − insurance − repairs − management − reserves.
Management in the sample is a dollar allowance, not a percent computed on the page. Debt service is excluded. Capital items you decide are reserves belong in the reserve line you type, or they are missing.
Some investors and lenders leave capital reserves out of NOI; say which convention you used.
Example
Illustrative example. Monthly rent of $2,250 is $27,000 a year. Vacancy of 6% removes $1,620, so effective rent is $25,380. Taxes $3,180, insurance $1,260, repairs $1,520, management $2,040, and reserves $900 leave NOI of $16,480. These figures are made up. They are not a rent roll this company manages.
If you also typed a price of $248,000 on the cap rate page, $16,480 ÷ $248,000 is about 6.6%. That second division is optional. NOI itself does not need a price.
Common pitfalls
Subtracting the mortgage inside NOI, then dividing by price, bakes the loan into a ratio that is supposed to ignore financing. Take the payment out and use cash-on-cash if the loan is the question.
Using gross rent with no vacancy assumes every month is collected. A 6% vacancy in the sample is not a market study. Replace it with a percent you are willing to defend.
Steps
Start with annual rent
Monthly rent times twelve is gross rent in this sketch. You type the rent. The page does not look it up.
Remove vacancy
Gross rent times the vacancy percent is the rent you do not collect. Effective rent is what remains.
Subtract operating expenses
Taxes, insurance, repairs, management, and reserves come off. Leave the loan payment out. The leftover is NOI.
Questions
Is NOI the same as cash flow?
No. Cash flow is what remains after the loan payment. NOI stops before that payment.
Should reserves be in NOI?
If you want the cap rate to reflect money you set aside for future repairs, include a reserve line. If you leave it out, the NOI is higher and the cap rate is higher.
Does the cap rate page rebuild this stack?
No. It divides the annual NOI you type by the price you type. Build the NOI here, on paper, or in the long-term rental calculator.
Where do utilities paid by the tenant go?
If the tenant pays them, they are not your expense. If you pay them, add a line. This sample has no utility line.
Is 6% vacancy a standard I should copy?
No. It is a sample percent so the subtraction has a number. The vacancy guide uses a different rent and a different percent.
Example only. Not financial, investment, legal, tax, lending, or appraisal advice.
Estimates only. Not financial, legal, tax, or investment advice. RE Underwrite Lab calculators and PDF reports provide educational estimates based on the numbers you enter. Actual purchase costs, rents, expenses, financing terms, taxes, insurance, vacancy, rehab costs, refinance eligibility, and returns vary by property, market, lender, and local law (including short-term rental rules). We do not guarantee any outcome, profit, cash flow, or appraisal. Some content and tools may be generated or assisted by artificial intelligence and can contain errors. Always verify assumptions with licensed professionals and your own due diligence before making decisions.