The Number That Tells You If a Rental Actually Makes Money
Two investors look at the same duplex listed at $450,000 that collects $42,000 a year in rent. The first sees a 9.3% return and gets excited. The second runs the net operating income and sees the real picture: after a 6% vacancy allowance and $14,500 in operating expenses, the property generates about $25,000 in NOI, which is a 5.6% capitalization rate. Same building, same rent roll, two completely different decisions. The difference is NOI.
What net operating income measures. NOI is the income a property produces after all operating expenses but before debt payments and income taxes. You start with gross potential rent, subtract a vacancy and credit loss allowance, add any other income like parking or laundry, then subtract operating expenses such as property taxes, insurance, maintenance, management, and utilities. What remains is the property's pure earning power, independent of how you finance it.
Why debt is deliberately excluded. NOI leaves out your mortgage payment on purpose. Two buyers might finance the same building differently, one paying cash and one borrowing 80%, but the building itself produces the same operating income either way. By excluding debt, NOI lets you compare properties on equal footing and is the foundation for the cap rate, the metric lenders and investors use to value commercial and rental real estate.
The vacancy line nobody wants to fill in. Optimistic buyers assume 100% occupancy. Reality runs closer to a 5% to 8% vacancy and credit loss factor in most markets, accounting for the weeks a unit sits empty between tenants and the rent that occasionally goes uncollected. On $42,000 of potential rent, a 6% allowance trims $2,520 off the top before you spend a dime on the property. Skipping this line is the single most common way investors overstate a deal.
Operating expenses add up faster than expected. A useful rule of thumb is that operating expenses often run 35% to 50% of gross income for residential rentals once you include taxes, insurance, repairs, management fees, and reserves for big-ticket items like a roof or HVAC. Underestimate these and your NOI looks great on paper and disappoints in your bank account. This calculator forces every line into the open so the number you get is the number you can trust.