Finance
How to Calculate Net Operating Income (NOI)
Net operating income is what a property produces after vacancy and operating expenses, and before debt and income taxes.
Quick answer
Start with gross scheduled income, add other income, subtract vacancy and credit loss, then subtract operating expenses. The result is NOI. Leave out mortgage payments, income taxes, depreciation, and capital projects.
Key takeaways
- Effective gross income is scheduled income plus other income, minus vacancy.
- NOI = effective gross income − operating expenses.
- Debt service is not an operating expense.
- A missing expense is not a higher value. It is a hole in the file.
The steps
Effective gross income − operating expenses
Effective gross income = gross scheduled income + other income − vacancy and credit loss.
| Line | Amount |
|---|---|
| Gross scheduled rent | $200,000 |
| Other income | $10,000 |
| Vacancy and credit loss | $10,000 |
| Effective gross income | $200,000 |
| Operating expenses | $70,000 |
| NOI | $130,000 |
Try the same structure in the NOI calculator. Change the vacancy line and watch NOI move. That sensitivity is the point of doing the math in public instead of trusting a single percentage on a flyer.
What goes in, and what stays out
| Usually in operating expenses | Leave out of NOI |
|---|---|
| Real estate taxes | Mortgage principal and interest |
| Insurance | Income taxes |
| Utilities the owner pays | Depreciation |
| Repairs and maintenance | Capital replacements, such as a new roof |
| Management, even if you self-manage | The down payment |
| A vacancy allowance | One-time loan costs |
Self-management is the expense people delete so the building looks stronger. If you manage it yourself, the next owner might hire a manager. Underwrite a fee you can explain, or state that you used zero and why. Bryan has managed property he owns, and the work is not free.
Use documents, not a rounded story
Gross scheduled income should tie to the leases or the rent roll. Other income might be parking, laundry, or billbacks. Vacancy should reflect empty space and credit loss you have actually seen, not a slogan. Operating expenses should tie to bills and the tax statement.
Omaha and Lincoln properties do not share tax bills, insurance costs, or utility rates. Do not paste an expense ratio from a seminar onto a local building. If a figure is missing, leave it missing until you have it.
What people do with NOI next
Divide NOI by price to get a cap rate. Compare NOI with annual debt service to get DSCR. Neither step is a loan approval. Neither step is an appraisal. How commercial property is valued shows where NOI sits beside sales and cost.
Questions people ask
Is NOI the same as cash flow?
No. Cash flow usually comes after debt service. NOI is before the loan.
Should I include a reserve?
If you include a reserve in expenses, NOI falls. If you leave it out, say that capital projects are still coming. Either approach is acceptable if it is visible.
What if the building is vacant?
Scheduled income may be a market rent you have not achieved. Label it as a forecast. Vacancy of an empty building is not a small percentage.
Can NOI be negative?
Yes. Expenses can exceed income. A negative NOI is information. It is a poor input for a flattering cap rate.
Written by Bryan Robinson, a Professional Sales Agent with NHS Commercial, licensed in nebraska.
Want help evaluating a commercial property?
Call or text Bryan at 402-521-3000 to talk through a specific property.
Bryan Robinson
NHS Commercial
Professional Sales Agent | Licensed in Nebraska