The standard NOI formula:
NOI = Gross Rental Income − Operating Expenses
That looks simple. The problem is what counts as an operating expense and what does not. Getting this wrong overstates NOI by 30-50%.
The expense categories that belong in NOI
Category Typical Range Source
─
Property tax 0.5-2.5% of value County assessor
Insurance (DP-3) $1,500-$4,500/yr State DOI data
Vacancy allowance 5-8% of GPR Census ACS / FRED
Maintenance 8-10% of EGI Industry standard
Property management 8-10% of EGI Local PM quotes
CapEx reserves 3-5% of EGI Component age analysis
Landlord utilities $0-$200/mo Lease terms
HOA $0-$500/mo Association docs
The items that do NOT belong in NOI
Mortgage (P&I) → financing cost, not operating
Depreciation → non-cash, tax accounting only
Income tax → varies by investor, not property
Capital improvements → one-time, not recurring
Loan origination fees → financing cost
Closing costs → acquisition cost
The mortgage exclusion is the most common mistake. Two investors buy the same property — one puts 20% down, the other pays cash. The NOI is identical. The cash flow is different. NOI measures the property. Cash flow measures the deal.
Full calculation: 3-unit property, $320K
STEP 1 — GROSS POTENTIAL RENT
Monthly rent: $1,100/unit × 3 units = $3,300/mo
Annual GPR: $3,300 × 12 = $39,600
STEP 2 — VACANCY
Rate: 7% (Census ACS data for this metro)
Vacancy loss: $39,600 × 0.07 = $2,772
Effective Gross Income: $39,600 − $2,772 = $36,828
STEP 3 — OPERATING EXPENSES
Property tax: $3,200 (county assessor, 1.0% of value)
Insurance: $2,100 (landlord DP-3 policy)
Property management: $3,315 (9% of EGI)
Maintenance: $2,946 (8% of EGI)
CapEx reserves: $1,841 (5% of EGI)
Utilities: $0 (tenant pays all)
HOA: $0
────────────────────────────
Total expenses: $13,402
STEP 4 — NOI
NOI = $36,828 − $13,402 = $23,426
What NOI tells you downstream
NOI feeds directly into the two metrics lenders and investors use most:
CAP RATE
Cap Rate = NOI / Property Value × 100
Cap Rate = $23,426 / $320,000 × 100 = 7.32%
A 7.32% cap rate means the property earns 7.32 cents
of net income for every dollar of value. Above 6% is
generally considered strong for residential.
DSCR (Debt Service Coverage Ratio)
DSCR = NOI / Annual Debt Service
Loan: $256,000 at 7.0%, 30yr → $1,703/mo → $20,436/yr
DSCR = $23,426 / $20,436 = 1.15
A DSCR of 1.15 means NOI covers the mortgage with
15% cushion. Most lenders require 1.25+. This deal
is borderline — needs either higher rent, lower price,
or larger down payment to qualify.
The expense ratio reality check
Expense Ratio = Total Expenses / Effective Gross Income
Expense Ratio = $13,402 / $36,828 = 36.4%
Typical ranges:
25-35% Well-managed SFR, low-tax state
35-45% Average multifamily, moderate expenses
45-55% Older property, high-tax state, deferred maintenance
55%+ Troubled asset or institutional management overhead
If someone tells you their NOI is 80% of gross rent, they forgot half the expenses.
What this calculation does not cover
It does not account for:
Rent growth (year 2+ projections)
Expense inflation (insurance +9% YoY in 2026)
Capital improvement needs (roof, HVAC, plumbing)
Lease-up period for vacant units
Concessions (free month, reduced deposit)
Seasonal vacancy patterns
Property-specific risks (environmental, structural)
NOI is a point-in-time income snapshot. For multi-year projections, use a pro forma with growth assumptions. For a quick NOI calculation with all standard expense categories, there is a free NOI calculator at ArvCalc.
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