How to Read Your NOI Calculator Results
The rules of thumb for net operating income are typically:
- NOI should be positive on an income-producing property.
- NOI is typically calculated on a yearly basis.
- NOI does not include your monthly mortgage payments.
- NOI is typically used to figure out cap rate, ROI, and cash flow to evaluate a property you’re investing in.
How the Net Operating Income Calculator Works
The net operating income calculator determines a property’s NOI by calculating data inputs, including gross rental income of your investment property, other income, vacancy losses, and operating expenses. The calculator will then use those inputs to tell you the property’s net operating income.
The calculator is easier than doing the calculations on your own, but in case you’re curious, we will provide you with the net operating income formula. Keep in mind that NOI is typically calculated on a yearly basis, so you may need to multiply your monthly rents and expenses by 12.
Let’s take a look at an example of how to calculate net operating income on an investment property. Remember that the NOI formula is gross rental income + other income – vacancy loss – operating expenses. Let’s assume that the gross rental income is $120,000 per year, other income is $12,000 per year, vacancy loss is $6,000 per year, and operating expenses are $40,000.
First, let’s figure out the total yearly income
$120,000 + $12,000 = $132,000
Then we subtract the vacancy loss
$132,000 – $6,000 = $126,000
Next, we subtract the operating expenses
$126,000 – $40,000 = $86,000 NOI
This is for year one, but it would continue to be the same if nothing changes, which would double your available cash in year two. The NOI shows you if the property has the potential to be profitable. Remember that it doesn’t include your monthly mortgage payment. After you calculate your NOI, you can use it to calculate cap rate, which is the rate of return on an income-producing property; cap rates of 4 percent to 10 percent and up are typically considered good.
It’s important to know your NOI so you can compare it to the NOIs of other properties; you can work to increase it to maximize your cash flow and use it to figure out the property’s cap rate and ROI. Typically, a higher NOI is the right property to choose, but you should also consider the property’s cash flow after your mortgage payment is factored in.
For more information on net operating income, the net operating formula and how to calculate it, check out our in-depth guide on net operating income.
Net Operating Income Calculator Inputs
When using the net operating income calculator, you will be prompted to enter certain inputs. These inputs include your gross rental income, other income, vacancy loss, and your operating expenses. We will explain each input for the net operating income calculator below.
Gross Rental Income for Investment Property
The first input needed for the net operating income calculator is your gross rental income. This is the combined total rent under the terms of each individual residential or commercial lease, assuming that the property is 100 percent occupied. If the property is not fully occupied, then the amount is referred to as potential rental income (PRI), and it’s based on a rental market analysis, according to the leases and terms of comparable properties in the area.
Other Income for Investment Property
The next input is other income, which refers to any additional income that the property generates (besides rental income). This can include things like parking, vending, and laundry income, as well as facility rentals and billboard or sign income. Basically, you should include all revenue streams coming from the income-producing property.
Vacancy Loss on an Investment Property
Vacancy loss is the loss of income due to tenants vacating the property and/or tenants defaulting on their lease payments. The vacancy loss can be calculated based on current lease expiration dates, and you can use vacancy rates for comparable properties if you’re not sure what your vacancy loss will be.
To calculate vacancy losses, look at what that unit could have rented for and multiply it by however many months out of the year it was vacant. For example, if other similar units rent for $3,000 per month and the vacant unit was empty for two months, you would multiply $3,000 by 2 and get $6,000, which is the yearly vacancy loss for the property.
Operating Expenses of an Investment Property
Your operating expenses are all of the expenditures needed to properly operate and maintain your income-producing property. The net operating income formula uses your total operating expenses, which you can calculate by adding up all of your separate operating expenses (such as property taxes and rental property insurance).
Operating expenses on a rental property usually consist of:
- Property Taxes: Generally assessed annually and if you have a mortgage, your lender may escrow them and they will be paid monthly with your mortgage payment. You can find the amount of your property taxes from your local property tax office, Zillow, or on your yearly tax assessment statement.
- Rental Property Insurance: Also known as landlord insurance, it is different from homeowners insurance, and a policy should include loss of income, liability and perils coverage. An average rental property insurance policy costs $1,473 to $1,596 per year.
- Property Management Fees: Fees charged by a property manager or management company to manage your property. The property manager typically collects rents, communicates with tenants, and coordinates maintenance and repairs. Management fees vary based on property location, property size, and scope of work, but typically range from 8 percent to 12 percent for an investment property and 25 percent or higher for a vacation rental property.
- Maintenance and Repairs: Things needed to upkeep an investment property, such as lawn care, snow removal, pest control, cleaning, etc. They also include repairs as needed, such as pointing bricks, replacing a leaky roof, or fixing faulty wiring. Maintenance and repairs typically account for 1 percent of the property’s value per year.
- Miscellaneous Expenses: Anything that you spend on the property that doesn’t fit into another operating expense category. This could be things like accounting, marketing, advertising, and legal fees. If you’re not sure what these expenses are, you can leave this field blank in the net operating income calculator.
Net Operating Calculator Outputs
Based on all of your inputs, the free net operating income calculator figures out the net operating income of the property. Once again, the net operating income formula that the calculator uses is NOI = Gross rental income + Other income – Vacancy loss – Operating expenses.
Net Operating Income
After you enter your inputs, such as gross rental income and operating expenses, the calculator will tell you your net operating income. You can then use this NOI to figure out your cap rate and cash flow, which are two additional ways to analyze an income-producing property.
Conversely, the NOI can also be helpful with a property you already own. It can help you figure out if your rents are too low, vacancy losses are too high, or operating expenses are too high.
When to Use a Net Operating Income Calculator for Real Estate
Net operating income is primarily used by buy and hold real estate investors to analyze an income-producing property and decide if it’s a good investment and whether or not they want to purchase it. By looking at the NOI of a few different properties, you can compare them to see which has the highest NOI in comparison to its sales price.
The net operating income calculator will easily calculate a property’s NOI based on inputs such as gross rental income and operating expenses, thus making it a valuable tool for both investors deciding if a property is worth the investment and investors who want to analyze their current property to try to increase their NOI or get the property ready to sell.
“I mostly use NOI to understand how my units are performing financially over time. If I see that NOI is slipping, I can take corrective action by analyzing it further. Is it down because of longer vacancies, higher maintenance costs, higher property taxes, etc.? Knowing the drivers of NOI and how to continuously improve it will make my rentals more profitable and ultimately more valuable to another investor should I ever want to sell.” – Domenick Tiziano, Blogger, Accidental Rental
A net operating income calculator can be used by the following types of investors:
- Residential Real Estate Investors: To compare the NOI of different properties and decide which one is worth purchasing
- Commercial Real Estate Investors: To analyze commercial income-producing properties and find one that is a good investment based on the NOI, cap rate and sales price
A net operating income calculator can be used for the following types of properties:
- Current Investment Property Owner: Analyze current NOI to do a financial check on their property and see how they can raise their NOI to increase cash flow
- Prior to Selling an Investment Property: You can see what your NOI is and find ways to improve it (e.g., raise rents, lower vacancy rates, etc.) so you can list it for a higher sales price
- Apartment Buildings: You can find out what your cash flow will be based on the NOI of an apartment building; because there often aren’t good comparables of apartment buildings due to the small market sector, NOI can help you compare available inventory
- Multifamily Properties: NOI can also help you compare multifamily properties and help you determine if it makes sense to invest in one
A net operating income calculator generally isn’t used by fix and flippers because they don’t intend to rent out their property. Instead, they would analyze an investment property by looking at the comparable property prices, the loan to value (LTV) and the after repair value (ARV).
Alternatives to Using NOI for Real Estate Investments
Knowing the net operating income of an income-producing investment property helps you analyze the property and make a purchase decision. However, there are also alternative ways of deciding if an investment property is right for you.
If the property isn’t fully rented, you’re not sure what the rents should be, or the property needs to be rehabbed, there are alternative ways to analyze an investment property. We recommend using two to three methods so you get a well-rounded financial picture of the property.
Some alternative to using NOI for real estate investments include:
- Cap Rate: This actually includes the NOI, and is used by investors to help determine the potential rate of return on an investment property. The cap rate formula is NOI divided by the current property value.
- The 1 Percent Rule: The gross monthly rental income should be a minimum of 1 percent of the purchase price. Some investors use the 2 percent rule, depending on the property type and location. If the property’s gross monthly income is 1 percent or more of the purchase price, it’s usually cash flow positive.
- Gross Rental Yield: This number can be found by dividing the annual rent collected by the total property cost and then multiplying by 100. The total property cost includes the purchase price, closing costs, and any renovation costs.
- Cash Flow: Evaluate the property’s potential cash flow by checking to see if the expected monthly rent will cover your costs, including mortgage payment, taxes, insurance, utilities, and HOA fees.
- Comparable Properties: Look at what other comparable properties have sold and rented for in the past three to six months. Comparables should be the same type of property, have similar amenities and be similar in size. They can be found by running a comparative market analysis.
- Return on Investment (ROI): Typically 10 percent or more is a good ROI for a real estate investment. You can figure out your ROI on an investment property by calculating your annual return and dividing that by your total cash investment. You can figure out your annual return by subtracting your expenses from your total rental income.
Net operating income can be calculated in different ways, but the generally accepted method is gross rental income plus any other income minus vacancies minus operating expenses equals net operating income. Real estate investors use NOI to help analyze income-producing properties. Our free NOI calculator helps figure out the calculations for you.