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
Converting a percentage to a decimal involves dividing the percentage value by 100.
IRV stands for Income, Rate, and Value. It represents the relationship between Net Operating Income (I), Capitalization Rate (R), and Property Value (V).
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
The gross rent multiplier (GRM) is a quick method for estimating the value of income-producing property by multiplying the property's gross rent by a factor derived from comparable sales. GRM = Sale Price / Gross Rent.
The capitalization rate (cap rate) is the ratio of a property's net operating income to its sale price, expressed as a percentage. It is used to estimate value and compare profitability of investment properties. Cap Rate = NOI / Value.
Frequently Asked Questions
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