The formula
NOI is effective gross income minus operating expenses:
NOI = Effective Gross Income − Operating Expenses
where EGI = gross potential rent − vacancy & loss-to-lease − concessions − bad debt + other income. NOI is measured before debt service, capital expenditures, and income taxes — it’s the property’s operating profit, independent of how it’s financed or who owns it.
Step 1: build effective gross income
Start at the top of the income statement and work down from theoretical to real:
EGI — 104 units, illustrative
The discipline here is to use economic revenue — what actually collects — not the gross potential rent the offering memorandum leads with. (See how to read a rent roll for where these figures come from.)
Step 2: subtract operating expenses
Operating expenses are the costs of running the property. Rather than trust a single “expenses” total off the seller’s statement, underwrite each line on its own — this is where a T-12 either checks out or falls apart. A worked breakdown for the same 104-unit property:
Operating expenses → NOI — same property
Net operating income
Stabilized multifamily typically runs an operating-expense ratio of 40–50% of EGI. A statement well outside that band is a prompt to dig in — either the property has an efficiency you can underwrite, or a cost has been left off (or a capital item has been buried in R&M).
The line that trips everyone: above vs below NOI
The most common NOI errors aren’t arithmetic — they’re putting the wrong items above or below the line. Here is the classification underwriters hold to:
Where each item belongs
- Capital expenditures are BELOW the line. A new roof, HVAC replacements, unit renovations — these are capital items, not operating expenses. Expensing them through R&M understates NOI and the value it supports. (Sellers sometimes do this accidentally; verify against the T-12.)
- Replacement reserves are a convention, not an expense. Lenders deduct ~$250–$300/unit/yr to get net cash flow; whether reserves sit above or below your NOI line depends on whose definition you’re using. Be explicit. (This is the NOI-vs-NCF distinction that decides DSCR.)
- Debt service is BELOW the line. NOI is unlevered by definition. Mortgage payments never touch it — that’s what makes NOI comparable across deals with different financing.
- The management fee is ALWAYS included. Even if the seller self-manages for free, underwrite a market fee (typically 3% of EGI). Omitting it overstates NOI and every ratio downstream.
- Owner income taxes are BELOW the line. NOI is a property-level number, before the owner’s tax situation.
EGI, NOI, and NCF: three levels, three uses
“Cash flow” gets used loosely, but underwriting depends on three distinct levels. Each strips one more layer off the top, and each answers a different question:
From collected revenue to net cash flow — same property
- EGI is the revenue line lenders and buyers trust — economic, not theoretical.
- NOI prices the asset: value = NOI ÷ cap rate, and it’s the number quoted in the going-in and exit cap.
- NCF is NOI after reserves; it’s the coverage basis most lenders size debt against, so it — not NOI — usually drives your DSCR.
The biggest single NOI error: seller’s taxes
Most jurisdictions reassess property value at sale, so the seller’s tax line reflects their old (often much lower) basis. Carry it into your NOI and you’ve overstated the property’s real operating income — sometimes by a full year of rent growth. Always re-underwrite taxes on your purchase price and the local millage rate.
Why NOI is worth getting exactly right
Everything downstream multiplies your error. Value is NOI ÷ cap rate, so at a 6% cap, a $50,000 NOI mistake moves valuation by $833,000. Loan proceeds are sized off NOI through DSCR and debt yield. And every return metric — IRR, equity multiple, cash-on-cash — flows from the cash NOI produces. Get NOI wrong and the whole model is confidently wrong.
That leverage is exactly why Nivora computes NOI from your reconciled rent roll and T-12 — reassessing taxes, applying a market management fee, and keeping capital items below the line — and re-runs it on every assumption change. See it on the live sample deal, computed by the real engine, or build your own NOI with the free NOI calculator.
Frequently asked questions
What is the formula for NOI?
NOI = effective gross income − operating expenses. Effective gross income is gross potential rent minus vacancy, loss to lease, concessions, and bad debt, plus other income. NOI is measured before debt service, capital expenditures, and income taxes, so it reflects the property’s operating profit independent of financing or ownership.
What is included in operating expenses for NOI?
Property taxes, insurance, utilities, payroll, repairs and maintenance, the management fee, marketing, contract services, and general and administrative costs. Stabilized multifamily operating expenses typically run 40–50% of effective gross income. Debt service, capital expenditures, replacement reserves, and owner income taxes are not operating expenses.
Is the management fee included in NOI even if the owner self-manages?
Yes. Always underwrite a market management fee — typically about 3% of effective gross income — even when the current owner self-manages for free. A buyer or a lender will price management as a real cost, so omitting it overstates NOI and every ratio downstream.
Are replacement reserves part of NOI?
Reserves are a convention, not an operating expense. Standard NOI is computed before reserves; lenders then deduct roughly $250–$300 per unit per year to reach net cash flow (NCF), which is the basis for debt-service coverage. Whether reserves sit above or below your NOI line depends on whose definition you are using, so be explicit about it.
What is the difference between NOI, EGI, and NCF?
Effective gross income (EGI) is the revenue that actually collects. NOI is EGI minus operating expenses — the unlevered operating profit. Net cash flow (NCF) is NOI minus replacement reserves (and, in commercial deals, leasing costs). Cap-rate valuation keys off NOI; lender coverage tests usually key off NCF.
Should I use the seller’s property taxes when calculating NOI?
No. Most jurisdictions reassess a property at sale, so the seller’s tax line reflects their old, often lower, basis. Carrying it forward overstates operating income — sometimes by a full year of rent growth. Re-underwrite taxes on your purchase price and the local millage rate.
Why does a small NOI error matter so much?
Everything downstream multiplies it. Value is NOI ÷ cap rate, so at a 6% cap a $50,000 NOI error moves the valuation by about $833,000. Loan proceeds are sized off NOI through DSCR and debt yield, and every return metric — IRR, equity multiple, cash-on-cash — flows from the cash NOI produces.
See it computed, not explained.
Every concept on this page is a number Nivora computes live — the real engine is running on a fictional 104-unit sample deal right now, no login required.