Then you\u2019re done! Let\u2019s break it down.<\/p>\n
Net Operating Income (NOI) = (Gross Income \u2013 Vacancy & Credit Loss) \u2013 Operating Expenses<\/strong><\/p>\n<\/div>\n Some websites simplify the NOI formula to just gross income minus operating expenses,<\/strong> but that skips an important step. I included vacancy & credit loss in the formula because it gives you a more accurate picture of what the property actually earns, especially if it\u2019s not fully rented year-round. Investors, lenders, and appraisers often use this version when analyzing a property\u2019s true income potential.<\/p>\n<\/div>\n<\/div>\n Here\u2019s how the numbers come together:<\/p>\n Exclude the following:<\/strong> mortgage payments, capital improvements such as a new roof or HVAC replacement, depreciation, and income taxes. These don\u2019t factor into NOI because they fall outside regular operating costs. They\u2019re either loan-related, long-term upgrades, or accounting entries that don\u2019t affect cash flow.\n<\/p>\n<\/div>\n<\/div>\n Want an easier way to track your rental income and operating expenses? Baselane is a property management platform that helps landlords organize their finances, collect rent, and automate expense tracking, so running NOI numbers takes minutes, not hours.<\/p>\n <\/p>\n So, in this case, your net operating income is $15,900 per year. That\u2019s the number you\u2019ll use to evaluate performance, calculate cap rate, or see if the property can support financing.<\/p>\n You won\u2019t need to run the NOI formula every day, but it\u2019s a number you\u2019ll come back to often. Here are the times you\u2019ll want to calculate it:<\/p>\n Net operating income isn\u2019t good or bad on its own. It has to be weighed against the property\u2019s price, the local market, and, of course, your investment goals. Here\u2019s how to gauge whether your NOI is pulling its weight:<\/p>\n \t\t \t\t \t\t \t\t \t\t \t\t \t\t \t\t \t\t \t\t While NOI is a key part of analyzing a property, it\u2019s not the only way to tell if a deal is right for you. Depending on the situation, other metrics may provide a clearer picture, especially if the property isn\u2019t stabilized yet or you\u2019re comparing multiple options.<\/p>\n Below are the most common metrics you\u2019ll see in real estate investing, what they measure, and when it makes the most sense to use them. In most cases, you\u2019ll use NOI as a starting point, then build on it with one of these.<\/p>\n <\/p>\n Pro-tip:<\/strong> Start with NOI to understand pure operating performance, then grab the metric that answers your next question: value (cap rate), lender fit (DSCR), investor payoff (cash-on-cash return), or rapid screening (1 percent rule).\n<\/p>\n<\/div>\n<\/div>\n![](\"https:\/\/assets.theclose.com\/uploads\/2024\/02\/dyk.png\")
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\n \nAnnual rent ($2,000 x 12)<\/th>\n $24,000<\/th>\n<\/tr>\n<\/thead>\n \n Laundry income<\/td>\n $600<\/td>\n<\/tr>\n \n Total gross income<\/strong><\/td>\n $24,600<\/strong><\/td>\n<\/tr>\n \n Vacancy & credit loss (5%)<\/td>\n \u2013$1,230<\/td>\n<\/tr>\n \n Effective income<\/strong><\/td>\n $23,370<\/strong><\/td>\n<\/tr>\n \n Property taxes and insurance<\/td>\n \u2013$3,200<\/td>\n<\/tr>\n \n Repairs and maintenance<\/td>\n \u2013$1,500<\/td>\n<\/tr>\n \n Property management (8%)<\/td>\n \u2013$1,870<\/td>\n<\/tr>\n \n Utilities<\/td>\n \u2013$900<\/td>\n<\/tr>\n \n Total operating expenses<\/strong><\/td>\n \u2013$7,470<\/strong><\/td>\n<\/tr>\n \n Net operating income (NOI)<\/strong><\/td>\n $15,900<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n When to calculate NOI<\/h2>\n
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What counts as a good NOI?<\/h2>\n
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\n\t\t\tCheck the implied cap rate:
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\n\t\t\tDivide NOI by the asking price. In most markets, stabilized rentals trading at 5-8% are considered solid. A number below that might still be fine if the area has strong appreciation potential.\t\t<\/span> <\/p>\n<\/li>\n<\/p>\n
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\n\t\t\tCompare to similar properties:
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\n\t\t\tPull recent sales or listings for properties with similar age, size, and location. If your NOI is higher and expenses are in line, you\u2019re looking at an operational win.\t\t<\/span> <\/p>\n<\/li>\n<\/p>\n
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\n\t\t\tRun the lender\u2019s DSCR test:
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\n\t\t\tBanks require NOI to cover loan payments by at least 1.20 times. If you\u2019re below that, either the price is too high, or the income\/expenses need work.\t\t<\/span> <\/p>\n<\/li>\n<\/p>\n
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\n\t\t\tLook for growth potential:
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\n\t\t\tA modest NOI today can still be considered \u201cgood\u201d if you have clear upside potential. Think below-market rents, unused storage space, or expense cuts you can make on day one.
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\n\t\t\tFactor in your return target:
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\n\t\t\tIf you\u2019re aiming for a 10% cash-on-cash return and the projected NOI meets or beats that after financing, it\u2019s good by your standards, no matter what the averages say.\t\t<\/span> <\/p>\n<\/li>\n<\/ul>\nNOI vs other metrics: What to use & when<\/h2>\n
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\n \nMetric<\/th>\n What it measures<\/th>\n Best time to use it<\/th>\n<\/tr>\n<\/thead>\n \n Cap rate<\/td>\n Property\u2019s unlevered return<\/td>\n Comparing two stabilized properties or estimating market value quickly<\/td>\n<\/tr>\n \n Cash flow<\/td>\n Dollars left in your pocket each month<\/td>\n Making sure rent will cover the mortgage and expenses<\/td>\n<\/tr>\n \n 1 percent rule<\/td>\n Quick sniff test for single-family and small multifamily properties<\/td>\n Screening lots of listings before running full numbers<\/td>\n<\/tr>\n \n Cash-on-cash return<\/td>\n Return on the cash you actually put in<\/td>\n Gauging true investor yield after financing<\/td>\n<\/tr>\n \n Gross rental yield<\/td>\n Rent relative to total acquisition cost<\/td>\n Comparing markets or property types at a glance<\/td>\n<\/tr>\n \n Comparable sales\/rents<\/td>\n Market prices and rent levels on similar properties<\/td>\n Valuing or underwriting when a property isn\u2019t fully stabilized<\/td>\n<\/tr>\n \n Debt service coverage ratio (DSCR)<\/td>\n Lender\u2019s safety margin<\/td>\n Checking loan eligibility or refinancing potential<\/td>\n<\/tr>\n \n Return on investment<\/td>\n Total return after sale or refinancing<\/td>\n Measuring overall success once you exit the deal<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/span>\n<\/div>\n
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