The NOI formula
NOI = Effective gross income − Operating expenses
Effective gross income is all rent and other income (laundry, parking, pet fees) minus vacancy and credit loss. Operating expenses are the costs of running the property. Mortgage payments, depreciation and capital improvements are not operating expenses.
Example
A fourplex brings in $3,100 a month including laundry. After 5% vacancy, effective income is $35,340 a year. Taxes, insurance, maintenance, utilities, other costs and an 8% management fee add up to about $13,627, leaving NOI of roughly $21,713. The expense ratio is about 39%.
Expense ratio as a sanity check
Most residential rentals run operating expenses of 35–50% of income. A seller's listing showing 20% usually means something has been left out.
Common questions
Is the mortgage part of NOI?
No. NOI is calculated before debt service, so it describes the property, not the loan.
How is NOI used?
It drives cap rate (NOI ÷ price), DSCR (NOI ÷ debt service) and the value most commercial lenders and appraisers assign.