How to Calculate NOI for an Apartment Building

You can read a T-12 (the trailing 12-month operating statement) and still get NOI wrong. The mistake is expensive. At a 5% cap rate, every $1 of NOI is worth $20 of value, so a $10,000 error in NOI is a $200,000 error in price.

This guide shows how to calculate NOI for an apartment building: the formula, what counts as income and expense, a worked example you can copy, and the mistakes that most often distort the number. When you have your figure, run it through our NOI calculator to see what more occupancy would add.

How to calculate NOI for an apartment building

NOI (net operating income) is the income a property collects minus the cost of operating it, before debt service and capital spending. The formula is:

Formula: NOI = effective gross income - operating expenses

Build it from the rent roll down, one line at a time, so no loss is hidden inside another number. The standard order is:

1. 1
   Gross potential rent (GPR): every unit at market rent for all 12 months.
2. 2
   Subtract loss to lease: the gap between market rent and what in-place leases actually pay.
3. 3
   Subtract vacancy loss: rent you did not collect because units sat empty.
4. 4
   Subtract concessions: free months and discounts used to sign leases.
5. 5
   Subtract bad debt: rent billed and never collected.
6. 6
   Add other income: everything beyond base rent, such as parking, pet rent and fees. The result is effective gross income (EGI).
7. 7
   Subtract operating expenses: the cost of running the property. The result is NOI.

Some statements start from scheduled rent (what the current leases pay) and skip step 2. Either way works, as long as you never count a line twice.

Where each line comes from

You rarely have all of this in one report. Pull it from three places:

• The rent roll (the list of every unit, its lease and its rent) gives you gross potential rent, loss to lease and which units were empty.
• The T-12 gives you vacancy, concessions, bad debt, other income and every expense line, month by month.
• The loan and tax documents tell you what to keep out: debt service, depreciation and income taxes belong to the owner's finances, not the property's operations.

If the T-12 groups vacancy and concessions into one "net rental income" line, ask for the detail. You cannot manage a loss you cannot see.

Where the calculators fit

Two free tools start where this formula stops. Put your NOI and your value into our cap rate calculator to see your cap rate, and to see what extra annual NOI is worth at that same rate.

Then use the NOI calculator to price a change in occupancy. You enter units, average rent, current occupancy and target occupancy, and it shows the added revenue and the asset value at a 5% cap rate. It treats the added rent as NOI, so the real lift is a little lower after the variable costs of each occupied unit.

What counts as income

Income is everything the property earns from operating, not from selling or refinancing.

• Rent: the base for every apartment, built up as gross potential rent.
• Other income: parking, storage, pet rent, utility reimbursements, laundry, package lockers and renter's insurance programs.
• Fees: application, late and administrative fees, where they are allowed and collected.

Do not count security deposits you will return, loan proceeds, insurance payouts for a one-off event, or gains from a sale. They are not operating income.

What counts as an operating expense

Operating expenses are the recurring costs of running the building. Marketing is one of them, which is why it reduces NOI dollar for dollar.

J.P. Morgan's guide to NOI and cash flow (opens in a new tab) (August 2024) makes the same cuts: loan payments, income tax and infrequent major projects such as replacing a roof are kept out of NOI.

Replacement reserves, a yearly set-aside per unit for future capital items, are the gray area. Some lenders and buyers deduct them above the NOI line and some below. Whichever you use, say so next to the number.

Worked example: a 100-unit building

Example: the figures below are illustrative, not a benchmark. The building has 100 units at an average market rent of $1,500 a month.

Read the result three ways:

• Per unit: about $9,900 of NOI a unit.
• Margin: NOI is 57.6% of EGI, and operating expenses are 42.4% of it.
• Value: at a 5% cap rate, $990,240 of NOI is worth about $19.8 million ($990,240 / 0.05).

Now see what a small change does. One point less vacancy loss is 1% of GPR, or $18,000 of added NOI. At a 5% cap rate that is $360,000 of value. That is the link between leasing performance and what the property is worth, and our guide to vacancy loss shows how to measure it unit by unit.

From NOI to value: the cap rate step

The net operating income formula gives you income. The cap rate (the market's expected return on a property, the NOI divided by the price) turns that income into a value. Value equals NOI divided by the cap rate. The same example building, at four cap rates:

A half point of cap rate moves the value by about $2 million on this example. That is why buyers argue about both numbers, and why you should know exactly how yours was built. Run the reverse the same way: divide a building's NOI by its price to see the cap rate you are paying.

Three ratios to check your NOI

A single NOI number tells you little. These three ratios tell you whether it is sound, and none needs an outside benchmark to be useful.

• NOI per unit: NOI divided by units. It lets you compare buildings of different sizes, and compare your building with itself year over year.
• Expense ratio: operating expenses divided by EGI. If it jumps, find the line that moved.
• NOI margin: NOI divided by EGI, which is the mirror of the expense ratio.

For net operating income in real estate, the trend matters more than any one year. A building whose NOI per unit rises while its expense ratio holds steady is improving. One whose NOI rises only because someone skipped repairs is borrowing from the future.

Which NOI should you use: T-12, T-3 or pro forma?

Say which version you mean, because they answer different questions.

• T-12: actual income and expenses for the last 12 months. This is the one buyers and lenders trust most, because it is history.
• T-3 annualized: the last three months multiplied by four. It shows direction, but a single quarter can mislead if the season or one-time items are unusual.
• Pro forma: a forecast of what the building should earn after planned changes, such as lower vacancy or higher rents. It is a plan, so label it as one.

When someone quotes an NOI, ask which of the three it is. Comparing a T-12 with a pro forma is how overpriced deals look reasonable.

Calculating NOI for a building you are buying

When you are evaluating an acquisition, do not start from the seller's NOI. Ask for the T-12 and the current rent roll, rebuild NOI yourself in the seven-step order, and then compare it with the number in the offering. Three places usually differ:

• Vacancy and concessions. Sellers sometimes show the best recent month. Use the trailing 12.
• Expenses. Property taxes can be reassessed after a sale, and insurance renews at today's price. Use the expense you will pay, not the one the seller paid.
• Other income. Check that every fee is collected and allowed, not just billed.

Every dollar you find at a 5% cap rate is $20 off the price you should pay.

Common NOI mistakes

• Leaving debt service in. In the example, adding a $600,000 loan payment would drop NOI to $390,240 and take about $12 million off the value at a 5% cap rate.
• Counting capital projects as expenses. A roof replacement belongs in the capital budget, not in one year's NOI.
• Hiding vacancy and concessions. Netting them into a single "rent collected" line makes it impossible to see what is leaking.
• Mixing time periods. A T-12 income line against a pro forma expense line gives a number nobody can compare.
• Skipping a cost the owner pays directly. If you pay utilities or a management fee outside the property's books, they still belong in NOI.
• Forgetting that marketing is an operating expense. It lowers NOI, so judge it by the vacancy and concessions it removes.

What to do next

This week:

1. 1
   Pull your last 12 months of income and expenses, plus the current rent roll.
2. 2
   Rebuild NOI in the seven-step order above, with vacancy, concessions and bad debt on their own lines.
3. 3
   Compare it with the NOI on your underwriting or your lender package, and explain any gap line by line.
4. 4
   Put the result in the cap rate calculator to see your cap rate.
5. 5
   Read our guide to ways marketing can raise NOI to see which lines you can move.

Then see what a few points of occupancy are worth in dollars: run the NOI calculator.