How to Calculate Net Operating Income
Net operating income is the number almost every rental property metric is built on. Cap rate, DSCR and cash-on-cash return all start with it, so getting it right matters more than any other step in your analysis.
The NOI formula
NOI = effective gross income - operating expenses.
Effective gross income is what the property actually collects: gross potential income times occupancy. Operating expenses are the costs of running the property day to day. Financing, depreciation and income taxes are left out, which is what lets you compare properties regardless of how they are owned or financed.
Step 1: Gross potential income
Start with what the property would collect if every unit were rented all year at its current or market rent. Add other income that the property reliably produces:
- Laundry and vending
- Parking, garages and storage
- Pet rent and pet fees
- Utility reimbursements billed back to tenants
- Late fees and application fees, if they are consistent from year to year
For a 12-unit building at $1,000 a month with $300 a month of other income, gross potential income is $147,600 a year.
Step 2: Apply occupancy
No building is full all year. Units turn over, some tenants do not pay, and some units sit empty during repairs. Multiply gross potential income by expected occupancy to get effective gross income. At 95% occupancy, the example becomes $147,600 x 0.95 = $140,220.
Use the occupancy the property and the neighborhood actually support. Check the seller's rent rolls for the past two years, ask local property managers, and lean conservative. A building that has averaged 92% will not become 98% because you bought it.
Step 3: Subtract operating expenses
Operating expenses are the recurring costs of owning and running the property:
- Property taxes. Use the tax the property will owe after your purchase, since many counties reassess on sale.
- Insurance, including flood or wind coverage if the lender requires it.
- Repairs and maintenance, including turnover cleaning and painting.
- Property management, typically 6% to 10% of collected rent. Include it even if you will self-manage.
- Utilities the owner pays: water, sewer, trash, common-area electricity, and heat in some older buildings.
- Landscaping, snow removal, pest control and other contracted services.
- Legal, accounting, advertising and licensing costs.
- A replacement reserve for roofs, HVAC, water heaters and appliances.
In the example, expenses at 45% of EGI are $63,099, so NOI is $140,220 - $63,099 = $77,121.
What does not belong in NOI
Leave these out, even though they are real costs to you as an owner:
- Mortgage principal and interest. Debt is compared to NOI separately, in DSCR and cash flow.
- Depreciation and amortization, which are accounting entries rather than cash costs.
- Income taxes, which depend on the owner, not the property.
- One-time capital improvements such as a new roof or a full kitchen remodel. Those are covered over time by the replacement reserve.
Sellers sometimes move routine repairs into capital improvements to make NOI look higher. If the seller's statement shows very low maintenance, ask for the capital expense history too.
Quick checks on a seller's NOI
Divide the seller's operating expenses by effective gross income. Small multifamily properties usually land between 40% and 50%. If the ratio is far below that, something is probably missing. Also compare property taxes on the statement to what the county will charge at your price, and confirm insurance with a real quote.
Once you trust the NOI, use it in the cap rate calculator to judge the price, the DSCR calculator to see how much a lender will lend, and the cash-on-cash return calculator to see what your cash earns.
Calculators for this guide
Results are estimates for education only, not financial, tax or legal advice. Check numbers with your lender and advisors before you buy. Last reviewed 2026-10-12.