How to Calculate NOI

The build-up

Start with gross potential rent, add other income such as parking, laundry and storage, then subtract vacancy and credit loss to get effective gross income.

From effective gross income, subtract operating expenses: property taxes, insurance, owner-paid utilities, repairs and maintenance, management, snow and landscaping, and administrative costs.

What does not belong in NOI

Mortgage principal and interest, capital expenditures, income tax and depreciation are all excluded. NOI describes the property's operations, not your financing or tax position.

Many underwriters do include a capital reserve line and disclose it. That is defensible as long as you are consistent when comparing properties.

Why small errors are expensive

At a 6% cap rate, every $1,000 of annual expense you overlook reduces value by about $16,700. A $3,000 error is a $50,000 mispricing.

This is also the mechanism behind value-add: a durable $6,000 NOI improvement is worth roughly $100,000 of value at the same cap rate.

Frequently asked