How to use the net operating income calculator
- Enter the rent per month from all units and any other income such as parking or laundry.
- Set a vacancy and unpaid rent allowance as a percent of income. The 5% shown is an example. Use your own, or 0.
- List each operating cost with its amount and whether it is per month or per year. Add rows for more costs.
- Read net operating income per year and per month, plus the share of income each cost uses.
Formula
Gross income = (monthly rent + other monthly income) x 12
Effective gross income = gross income x (1 - vacancy %)
Operating costs = sum of all costs, each converted to a year
Net operating income = effective gross income - operating costs
Operating costs as a share of income = operating costs / effective gross income x 100%.
A rental collecting $3,000 a month
Gross income is $3,000 x 12 = $36,000. With a 5% vacancy allowance, $1,800 is lost and effective gross income is $34,200. The costs are property tax $4,800, insurance $1,400, repairs $2,400, management at $200 a month ($2,400 a year) and utilities $1,000, which total $12,000.
Net operating income is $34,200 - $12,000 = $22,200 a year, or $1,850 a month. Operating costs use 35.09% of effective income. With a 0% vacancy allowance the result would be $36,000 - $12,000 = $24,000.
What counts as an operating cost
Net operating income measures what the property earns from operating it, before financing and taxes on you. Common entries are property tax, insurance, repairs, management fees, utilities and supplies you pay as the owner.
Mortgage payments, depreciation, income tax and large capital projects such as a new roof are left out by definition. Whether a cost belongs in the list is your decision, and that choice changes the result.
Using the result
Divide net operating income by a price to get a capitalization rate with the cap rate calculator, or by the price on the rental yield calculator. To see operating costs as a share of income on its own, use the operating expense ratio calculator.
The rental property calculator goes on to include the loan and shows cash flow. Net operating income is only the first step toward that number.
Assumptions and limits
- Rent and other income stay the same all year, apart from the vacancy allowance.
- The vacancy allowance applies to rent and other income together.
- Monthly costs are multiplied by 12 and yearly costs are used as entered.
- Mortgage payments, depreciation, income taxes and capital improvements are excluded.
Frequently asked questions
How do you calculate net operating income?
Add up the rent and other income, subtract the allowance for vacancy and unpaid rent, then subtract the yearly operating costs. What remains is net operating income.
Is the mortgage part of operating expenses?
No. Net operating income is measured before debt payments so that properties can be compared whatever the financing. Loan payments are counted later when you look at cash flow.
Is net operating income the same as profit?
Not quite. It leaves out financing, depreciation and income taxes, so the cash you keep can be lower. It is the property's operating result, not your final profit.
Why include a vacancy allowance?
Units are not always rented and tenants sometimes pay late or not at all. Entering an allowance keeps the income figure from assuming a full year of collected rent. Use 0 if you want to see the best case.