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After $2,280 of vacancy and $17,100 of operating costs, $26,220 of the $45,600 rent roll is left before any loan payment.

From rent roll to net operating income

per year

Gross rent$45,600

Vacancy−$2,280

Operating costs−$17,100

NOI$26,220

The math, with your numbers

Gross scheduled income$45,600Monthly rent × 12$3,800 × 12

Vacancy$2,280Gross × vacancy rate$45,600 × 5%

Effective gross income$43,320Gross − vacancy$45,600 − $2,280

NOI$26,220Effective gross income − operating costs$43,320 − $17,100

Expense ratio39.5%Operating costs ÷ effective gross income$17,100 ÷ $43,320

Each 5 points of vacancy$2,280Gross × 5%$45,600 × 5%NOI lost for every 5 points of extra vacancy.

NOI leaves out the mortgage, depreciation, capital expenditures, and income taxes. A new roof never shows up here.

How this calculator works

NOI = Effective Gross Income minus Operating Expenses. Effective gross income is the full rent roll less vacancy and credit loss. On the $425,000 duplex: $3,800 a month is $45,600 of gross scheduled rent, 5% vacancy takes $2,280 to leave $43,320 of effective gross income, and $17,100 of operating expenses brings NOI to $26,220.

Operating expenses are the costs of running the building: property taxes, insurance, management, repairs, owner-paid utilities, turnover, and reserves where the analysis carries them. Four costs stay out by convention: mortgage principal and interest, depreciation, capital expenditures, and income taxes. That exclusion list is what makes NOI comparable between buyers, because it strips out everything that depends on who owns the building and how they paid for it.

Key insights

NOI feeds almost every other number on this site. Cap rate divides it by price, DSCR divides it by debt service, and an income-capitalization valuation multiplies it by the inverse of the cap rate. One error in NOI propagates into all three at once.

The vacancy assumption does quiet work. Moving from 5% to 10% on this duplex drops effective gross income to $41,040 and NOI to $23,940, which pulls the cap rate from 6.2% to 5.6% at an unchanged price.

Excluding capital expenditures is what makes NOI comparable and also what makes it optimistic. Roofs, furnaces, and parking lots are real cash the metric never sees, and one replacement cycle can absorb several years of yield.

Owner-managed properties frequently report an NOI with no management fee in it. Adding back whatever a third-party manager charges in that market is the adjustment that makes an owner-managed building comparable to a professionally managed one.

Frequently asked questions

What is the NOI formula?›

NOI = Effective Gross Income minus Operating Expenses, where effective gross income is gross scheduled rent minus vacancy. On this duplex: $45,600 of rent, less $2,280 of vacancy, less $17,100 of expenses, gives $26,220.

Is the mortgage payment an operating expense?›

No. Principal and interest are debt service, which sits below NOI. Excluding it is what lets two buyers with different loans compare the same building on the same terms.

Are capital expenditures included in NOI?›

Not under the standard definition. A new roof is a capital expenditure, while patching the existing one is a repair and does count. The line between them moves real money, which is why a seller-prepared NOI is worth recomputing.

What vacancy rate should the calculation use?›

The rate the submarket actually runs, not a round number chosen for convenience. The gap between a 5% and a 10% assumption is $2,280 of NOI on this duplex, which is roughly a 0.6 point swing in cap rate.

What is the difference between NOI and cash flow?›

NOI is before debt service; cash flow is after. On this duplex NOI is $26,220 and cash flow with a $340,000 loan at 7% is negative $924, because annual debt service is $27,144. Same building, different question.

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