Compute a property's annual net operating income (NOI) after vacancy and operating expenses, a core metric for rental profitability and capitalization rate.
Input Data
Results
At a glance:NOI is a property's income after vacancy and operating expenses but before financing costs, used to value income-producing real estate.
Formula
effectiveGrossIncome = grossAnnualRent × (1 − vacancyPercent%) + otherIncome
noi = effectiveGrossIncome − operatingExpenses
$$\text{EGI} = \text{Gross Rent} \times (1 - \text{Vacancy \%}) + \text{Other Income}$$$$\text{NOI} = \text{EGI} - \text{Operating Expenses}$$How to Use
- Enter the potential gross annual rent.
- Enter the vacancy rate and other income.
- Enter the annual operating expenses.
- Review the effective gross income and NOI.
FAQ
Why doesn't NOI include the mortgage?
NOI measures the operating profitability of the property itself, independent of how the buyer finances it. By leaving out the mortgage, different investors can compare the same property on an equal footing using one NOI, then apply their own loan terms to assess cash flow and return.
What counts as operating expenses?
Management fees, rates and government rent, repairs and maintenance, insurance, property tax, and cleaning and security are operating expenses. Mortgage payments, depreciation, and large renovations (capital expenditures) are not counted in NOI.
What is the relationship between NOI and the capitalization rate (cap rate)?
The capitalization rate (cap rate) = NOI ÷ property value. NOI is the numerator in the cap rate, so an accurate NOI estimate is essential to assessing a property's yield; overstating NOI inflates the cap rate and the apparent return. Conversely, with a market cap rate you can back out the property's value (value = NOI ÷ cap rate), the standard income approach used in professional valuation. Because NOI deliberately excludes mortgage payments, the cap rate is also independent of the buyer's financing, letting different properties be compared on the same basis.
Which items are operating expenses and which are not?
The key to a correct NOI is drawing the boundary of 'operating expenses' accurately — it should include the day-to-day costs of keeping the property rented, but not mortgage payments, depreciation, or capital expenditures. Items to include: property management fees, rates and government rent, building insurance, routine repairs, cleaning and security, common-area utilities, and fees for letting/management agents — all real annual outlays of owning and renting the property. Three types are deliberately excluded: first, mortgage payments (principal and interest) are financing costs that depend on how the buyer borrows and are irrelevant to the property's earning power, so including them would destroy NOI's cross-property comparability; second, depreciation is a non-cash accounting allocation with no actual cash outflow; third, capital expenditures (CapEx) such as replacing the whole air-conditioning system, re-roofing, or major renovations are capital investments, not routine operations, and are handled separately. Understanding this boundary matters because NOI's purpose is to measure purely the property's operating earning power — deducting the mortgage or depreciation would no longer give an NOI usable for a standard cap rate or cross-property comparison.
How do vacancy and other income affect NOI?
NOI is built from effective gross income (EGI), which equals potential gross rent × (1 − vacancy rate) plus other income such as parking, storage, or laundry. A higher vacancy rate directly lowers EGI and therefore NOI; optimistic full-occupancy assumptions will overstate both NOI and the property's value. Other income, often overlooked, legitimately lifts EGI and NOI. In the Hong Kong context, be sure to estimate rates, government rent, management fees and repairs realistically so the resulting NOI reflects actual conditions.
References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.