The NOI calculation: start with potential gross income (PGI), subtract vacancy and collection losses for effective gross income (EGI), then subtract operating expenses to get NOI. Operating expenses include property taxes, insurance, management fees, maintenance, and reserves for replacement. They do NOT include debt service, income taxes, depreciation, or capital improvements.
An apartment complex has PGI of $500,000. Vacancy is 5% ($25,000), making EGI $475,000. Operating expenses total $175,000. NOI = $475,000 - $175,000 = $300,000. The owner's $200,000 annual mortgage payment is NOT included.
The most important thing to remember is what is NOT included in operating expenses: mortgage payments (debt service), income taxes, depreciation, and capital expenditures. If a question lists expenses and includes mortgage payments, you must exclude them when calculating NOI.
Related Terms
Related Concepts
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
Converting a percentage to a decimal involves dividing the percentage value by 100.
Monthly interest is the portion of the total annual interest that is paid or accrued each month.
Annual interest is the total amount of interest charged on a loan or investment over a year.
Frequently Asked Questions
Study This in Your State
Net Operating Income (NOI) may have state-specific rules. Choose your state to study Real Estate Math with localized content: