How to Calculate NOI (Step-by-Step + Free Calculator)

Net operating income is the number every commercial real estate deal gets built on. Get NOI wrong and your cap rate is wrong, your loan sizing is wrong, and your offer price is wrong. This page walks through the calculation line by line, with a full worked example, so you can run it on your own deal in the next ten minutes.

What NOI Actually Measures

Net Operating Income (NOI) is the income a property generates from operations, before financing costs, income taxes, and capital expenditures. It’s a property-level number, not an investor-level one. Two buyers looking at the same building, one paying all cash and the other financing 75% loan-to-value, end up with very different cash flow. Their NOI is identical, because NOI describes what the real estate itself produces, independent of how anyone chooses to pay for it.

That’s the point of the metric. Because NOI strips out financing and tax decisions, it lets you compare properties, deals, and offers on an apples-to-apples basis. It’s also the number lenders and appraisers anchor to when they size a loan or value an asset.

The NOI Formula

At the top level, the formula is short:

NOI = Effective Gross Income (EGI) − Operating Expenses

Getting to EGI takes a few steps of its own. In full, the chain looks like this:

1. Gross Potential Income (GPI): every dollar the property could collect at 100% occupancy and full market rent.
2. Less vacancy and credit loss: what you lose to empty units and unpaid rent.
3. Plus other income: parking, laundry, pet fees, and similar non-rent revenue.
4. Equals Effective Gross Income (EGI): the income you can expect to collect.
5. Less operating expenses: the recurring costs of running the property.
6. Equals Net Operating Income (NOI).

Walk through each step once and it becomes mechanical.

Step 1: Calculate Gross Potential Income (GPI)

GPI is your ceiling: the rent roll if every unit were leased at market rent for the full year with zero vacancy. Pull current market rents from your own rent roll, if in-place leases are at or near market, or from a rent comp survey of similar properties nearby.

GPI = Number of Units × Market Rent per Unit per Month × 12

For a commercial property leased on a per-square-foot basis, swap units and monthly rent for rentable square footage and the annual rent per square foot.

Don’t use the seller’s asking pro forma rents unless you’ve verified them against actual comparable leases signed in the last six to twelve months. Inflated pro forma rents are the single most common way a seller’s NOI gets padded before a sale.

Step 2: Deduct Vacancy and Credit Loss

No property runs at 100% occupancy indefinitely. Vacancy loss accounts for the gap between move-outs and new leases; credit loss accounts for tenants who don’t pay. Most underwriters combine both into a single vacancy and credit loss line.

Vacancy & Credit Loss = GPI × Vacancy Rate

Use the property’s own trailing twelve-month history if it’s stabilized, or a market vacancy rate from a comp set if it isn’t. Stabilized multifamily in most markets runs somewhere in the 5–10% range; value-add or lease-up assets can run much higher until they stabilize. Whatever number you use, source it. Vacancy and rent are the two levers that most affect your GPI ceiling, so don’t guess at either.

Step 3: Add Other Income to Get Effective Gross Income (EGI)

Rent isn’t the only revenue a property throws off. Common other-income line items include parking or carport fees, laundry and vending, pet fees, storage rentals, application and late fees, and, for some commercial properties, rooftop or antenna leases. Individually these are small. Across a full portfolio they add up.

Verify each line is recurring. A seller who books a one-time insurance settlement or a single large late-fee collection as “other income” is inflating EGI with something that won’t repeat under your ownership.

EGI = GPI − Vacancy & Credit Loss + Other Income

Step 4: Itemize and Subtract Operating Expenses

Operating expenses are the recurring cash costs of running the property. Standard line items include:

• Property management fees. Include a market-rate fee even if you self-manage, or you’re not pricing the deal the way a buyer eventually will.
• Real estate and property taxes. Use the assessor’s actual bill, not the seller’s estimate, and check whether a sale will trigger reassessment.
• Insurance (hazard and liability). Get an actual quote rather than carrying the seller’s expiring policy forward.
• Repairs and maintenance.
• Utilities paid by the landlord, whether common-area only or the whole building if it’s master-metered.
• Landscaping, grounds, and snow removal.
• Administrative and accounting costs.
• Pest control.
• Advertising and leasing costs.

What’s left out of NOI, on purpose: debt service (your mortgage payment), income taxes, depreciation, and capital expenditures or replacement reserves. Those are real costs of owning the property, but they’re financing, tax, and capital decisions, not operating costs, so they get subtracted below NOI rather than inside it. If you want to budget for a future roof or HVAC replacement, track that reserve separately and subtract it after NOI when you calculate cash flow.

NOI = EGI − Total Operating Expenses

Worked Example

Here’s the full calculation on a 20-unit garden-style apartment building.

Line Item	Calculation	Amount
Gross Potential Income	20 units × $1,400/mo × 12	$336,000
Less: Vacancy & Credit Loss (5%)	$336,000 × 5%	($16,800)
Plus: Other Income	Parking, laundry, pet fees, late fees	$7,200
Effective Gross Income (EGI)	$336,000 − $16,800 + $7,200	$326,400
Property Management (7% of EGI)	Per operating statement	($22,848)
Real Estate Taxes	Per operating statement	($28,000)
Insurance	Per operating statement	($11,500)
Repairs & Maintenance	Per operating statement	($15,000)
Utilities (common area)	Per operating statement	($7,200)
Landscaping & Grounds	Per operating statement	($4,200)
Administrative	Per operating statement	($2,600)
Pest Control	Per operating statement	($900)
Advertising & Leasing	Per operating statement	($1,752)
Total Operating Expenses	Sum of expense lines	($94,000)
Net Operating Income (NOI)	$326,400 − $94,000	$232,400

This building generates $232,400 a year in NOI. At an asking price of $2,900,000, that works out to an 8.01% cap rate ($232,400 ÷ $2,900,000). Whether that’s a good number depends on the market, the asset’s condition, and what comparable properties are trading at, but it’s the correct NOI to bring into that comparison.

Common Mistakes That Distort NOI

• Including debt service. If you’re subtracting the mortgage payment before you get to NOI, you’ve calculated cash flow, not NOI. Keep the two separate.
• Using pro forma rents without verification. If in-place rents sit below market, that can be real upside, but only if the increase is backed by real comps and a real path (turnover, renovation, lease-up) to get there.
• Skipping a market-rate management fee on owner-managed deals. Your labor isn’t free. Price it in, or your NOI overstates what the property produces on its own.
• Trusting the seller’s expense numbers without verification. Pull the actual tax bill, get an actual insurance quote, and ask for trailing twelve months of real operating statements, not a broker’s marketing pro forma.
• Booking one-time income as recurring. A single lease-termination fee or insurance payout inflates EGI for one year and disappears the next.

Why NOI Is the Number That Matters Most

NOI feeds almost every other underwriting metric on the deal:

• Value. Value = NOI ÷ Market Cap Rate. Every dollar of NOI you add is worth 1 ÷ cap rate dollars of value. At a 7% cap rate, an extra $1,000 in annual NOI adds roughly $14,286 in value. At a 5% cap rate, that same $1,000 adds $20,000. The cap rate levers every dollar of NOI into an outsized swing in value, which is why serious operators fight over small rent increases and small expense cuts.
• Loan sizing. Lenders size commercial loans off NOI two ways: loan-to-value, and debt service coverage ratio (NOI ÷ annual debt service), with most lenders requiring somewhere in the 1.20x–1.35x range depending on property type and market. Whichever test produces the smaller loan amount is usually what you get.
• Deal comparison. Because it strips out financing, NOI is the one number you can use to compare a cash deal to a leveraged deal, or one market to another, without the comparison getting distorted by how each buyer chose to pay.

NOI Questions Worth Settling Before You Underwrite

Does NOI include capital expenditures or reserves? No. NOI covers recurring operating costs only. Capital items, a new roof, a parking lot repave, a unit renovation program, get tracked and subtracted separately, after NOI, when you calculate actual cash flow. Some lenders require you to model a reserve for underwriting purposes, but that reserve reduces the loan they’ll size, not the NOI figure itself.

Is NOI the same as cash flow? No, and mixing the two up is the most common error new investors make. Cash Flow Before Tax = NOI − capital reserves − annual debt service. NOI tells you what the property produces. Cash flow tells you what’s left in your pocket after you’ve paid the lender and set aside money for capital needs.

What counts as a “good” NOI or expense ratio? There’s no universal number. A $200,000 NOI can be excellent on a $2.5 million property and mediocre on a $4 million one. The useful comparisons are NOI relative to purchase price (cap rate) and your expense ratio relative to genuinely comparable properties, not a rule-of-thumb percentage pulled from a different market or asset class.

How often should you recalculate NOI? At minimum, once a year with the new operating statement and rent roll. Recalculate again after any material lease change, renovation, refinance, or before you list the property for sale. Lenders underwriting a purchase or refinance will want a trailing twelve-month NOI, not a single month annualized.

Run the Numbers on Your Own Deal

You don’t need a spreadsheet to run this calculation once. ProForma School’s free Cap Rate & NOI Calculator, part of the CRE Calculators library, takes the same inputs walked through above (gross potential income, vacancy rate, other income, and your operating expense line items) and returns EGI, NOI, cap rate, and implied value instantly. No account, no login, no cost.

Run your own deal through it, then compare the result against what the seller’s marketing package claims. The gap between the two is usually where the real due diligence starts.