Net operating income (NOI)
Landlords and brokers use this for quick underwriting before full pro formas.
Example scenario
A small multifamily owner underwrites a $286,000 annual gross scheduled rent roll, models 6% combined vacancy and credit loss in line with T-12 loss history, and books $118,000 in controllable and fixed operating expenses before debt service. Effective gross income after leakage is $268,840, and estimated net operating income after operating expenses is $150,840. That NOI line becomes the numerator for cap-rate valuation and DSCR analysis once debt service is layered separately.
Net operating income (NOI)
Gross rent x (1 - vacancy) - expenses
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How to use the net operating income (noi)
- Input annual gross scheduled rent ($) from rent roll or GPR schedules aligned with contract rents, not aspirational market rents.
- Set vacancy plus credit loss (%) using T-12 collections and economic vacancy definitions consistent with your lender or investor memo.
- Input annual operating expenses ($) for property taxes, insurance, payroll, repairs, utilities, and management—exclude mortgage principal, interest, leasing commissions, and capital reserves unless your policy bundles them.
- Review estimated NOI and effective gross income; stress vacancy up and expenses higher before translating NOI into cap-rate value or debt coverage.
Rent roll and NOI benchmarks
- Economic vacancy underwriting bands
- Stabilized multifamily portfolios often model roughly 5–8% economic vacancy plus credit loss unless trailing operations or lease-up prove tighter.
- Operating expense ratio (OER) guardrails
- Class B/C multifamily OER frequently clusters roughly 35–45% of effective gross income depending on payroll, utilities, and tax reassessment exposure.
- GPR versus collected rent
- Gross scheduled rent must reconcile to lease abstracts; concessions and bad debt belong in the vacancy and credit-loss line or a separate adjustment, not double-counted.
Best use cases
- Forecasting and scenario planning
- Client education and pre-qualification
- Budget and performance decision support
Frequently asked questions
Should vacancy and credit loss include free rent and concessions?
Usually yes when expressed as economic vacancy: loss-to-lease and concessions reduce collectible rent and belong in the same leakage bucket if your historical reporting captures them there rather than as rent discounts off GPR.
Why exclude debt service from operating expenses?
NOI isolates property operations from capital structure; lenders compute debt service coverage from NOI divided by scheduled principal and interest.
Does this NOI equal cash flow before taxes?
Not necessarily. NOI ignores debt service, leasing capital, tenant improvements, reserves, and timing differences between accrual rents and cash receipts.
How does effective gross income relate to cap rates?
Investors divide NOI by purchase price or value for going-in yield; using consistent GPR, vacancy, and opex definitions avoids distorted cap-rate comps across deals.
Glossary
Scenario modeling
Testing multiple assumptions to estimate possible outcomes before execution.
Commercial intent
User behavior indicating readiness to buy, subscribe, or request a quote.
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Category: Income-property NOI modelingTopics: Effective gross income, Vacancy and credit loss, NOI underwriting
Last reviewed: 2026-05-07
Reviewed by: Calclet Growth Team