NOI Calculator

Maintenance and CapEx reserves are the two lines investors delete when a deal will not work, and they are the two lines that decide whether it does. On the loaded example they are $1,590 each — $3,180 a year, or 10% of scheduled rent.

Delete them and NOI jumps from $19,310 to $22,490, the cap rate goes from 7.29% to 8.49%, and monthly cash flow appears to be $585 rather than $320. Nothing about the building changed. The roof still has the same twelve years left on it.

What is the NOI formula?

NOI = effective gross income − operating expenses. Effective gross income is scheduled rent plus other income, less vacancy and credit loss. On the example here, $31,065 of effective gross income less $11,755 of operating expenses gives $19,310 of net operating income.

Is the mortgage payment an operating expense?

No. Neither principal nor interest belongs in NOI. Debt service is a financing cost, and including it would make NOI — and therefore cap rate and property value — depend on how the buyer chose to fund the purchase. Depreciation and income tax are excluded for the same reason: they describe the owner, not the building.

Should CapEx be included in NOI?

The capital spend itself is not, but a CapEx reserve is. Replacing a roof is a capital item that goes on the balance sheet and is depreciated. Setting aside 5% of rent every month against the roof you will eventually replace is an operating budget line, and leaving it out is how a deal that appears to make $320 a month turns out to make nothing.

What is the difference between NOI and cash flow?

Exactly one line: debt service. NOI on this example is $19,310; subtract $15,469 of annual mortgage payments and pre-tax cash flow is $3,841. NOI belongs to the property; cash flow belongs to you.

What percentage of rent should operating expenses be?

For small residential rentals, 35% to 50% of gross rent is the usual range once management and reserves are counted. The itemised budget in this example comes to 37.0% of scheduled rent. Anything materially under 30% usually means a line has been left out — most often reserves or management.

NOI is the numerator of the cap rate calculator and of the DSCR calculator. For the shortcut that estimates operating expenses at half of gross rent — and how it compares to a real budget — see the 50% rule.