How to calculate net operating income (NOI) for an apartment building
Net operating income is the building's income from operations minus its operating expenses, before loan payments, depreciation, big improvements and income tax. For an apartment building: start with the rent every unit could earn, subtract vacancy and unpaid rent, add other income such as laundry and parking, then subtract the costs of running the property. The worked example below takes a 24 unit building from $388,800 of potential rent to $209,760 of NOI.
The formula
| Step | Line | What it means |
|---|---|---|
| 1 | Gross potential rent | Every unit at its current rent for the full period |
| 2 | Minus vacancy and credit loss | Rent lost to empty units and to rent never collected |
| 3 | Plus other income | Laundry, parking, storage, fees, utility bill-backs |
| 4 | Equals effective gross income | What the building actually brought in from operations |
| 5 | Minus operating expenses | Taxes, insurance, utilities, repairs, management, payroll and the rest |
| 6 | Equals net operating income | What operations leave before debt, depreciation and improvements |
NOI is not a tax figure. Your Schedule E deducts mortgage interest and depreciation, which NOI leaves out, so the two numbers will differ. That is expected.
A worked year
Example a made-up 24 unit building with an average rent of $1,350 a month. Gross potential rent is 24 times $1,350 times 12, or $388,800. Vacancy and unpaid rent come to 5%, or $19,440. Laundry and parking bring in $6,000. Effective gross income is $388,800 minus $19,440 plus $6,000, which is $375,360.
| Operating expense | Year |
|---|---|
| Property taxes | $48,000 |
| Insurance | $21,600 |
| Water, sewer, trash and common-area power | $36,000 |
| Repairs and maintenance | $28,800 |
| Cleaning, landscaping and snow removal | $7,200 |
| Payroll or contract labor for on-site help | $18,000 |
| Legal, accounting and software | $6,000 |
| Total operating expenses | $165,600 |
Example continuing the made-up building, NOI is $375,360 minus $165,600, which is $209,760. Operating expenses are $165,600 divided by $375,360, about 44% of effective gross income.
What stays out of NOI, and why
- Loan payments, both principal and interest. NOI measures the building, not how you financed it, so two owners with different loans can compare the same building.
- Depreciation. It is a tax deduction for the building wearing out, not cash spent this year.
- Capital improvements, such as a new roof or every window in a unit. These are usually shown below NOI as capital spending. Some lenders and buyers also subtract a yearly replacement reserve; if you do, say so.
- Income tax, because it depends on the owner, not the property.
- Owner distributions and contributions, which are money moving between you and the property.
The same rules about what is an expense and what is an improvement apply as on your tax return. The IRS says improvements must be capitalized (Publication 527), which is why a roof is not in the operating expense table above.
What NOI is used for
Covering the loan
Example if the made-up building's loan payments are $140,000 a year, NOI covers them 1.50 times ($209,760 divided by $140,000 is about 1.498). Lenders call this the debt service coverage ratio and set their own minimum in the loan terms.
Valuing the building
Example if a buyer offers $3,000,000 for the made-up building, its NOI is about 7.0% of the price ($209,760 divided by $3,000,000 is 6.99%). That ratio is the capitalization rate, or cap rate. Turned around, a buyer who wants a given cap rate divides NOI by it to get a price.
Tracking the trend
Lenders and buyers usually ask for the trailing twelve months: NOI for the last twelve full months, added up. Figuring it monthly lets you see a trend before it shows in a year-end number, for example insurance renewing at a higher premium, or vacancy creeping up across several units.
Example if the made-up building's NOI ran at $17,480 every month, the year is twelve times $17,480, or $209,760. If insurance then renews $3,600 a year higher with nothing else changing, the next twelve months' NOI falls to $206,160, or $17,180 a month.
Because price follows NOI, a $1,000 a year cut in operating costs or rise in other income can matter more at sale than it does in one year's cash. Track NOI monthly, not only at tax time.
Where NOI figures go wrong
- Using scheduled rent and forgetting vacancy and unpaid rent.
- Leaving out a management fee because you manage the building yourself. A buyer or lender will add one back in, so show it both ways.
- Counting a security deposit received as income.
- Burying a $15,000 improvement in repairs, which lowers NOI for one year and makes the building look worse than it is.
- Mixing two buildings' numbers. NOI is per property.
How DoorKeeping handles it
Each property in DoorKeeping has its own books, so NOI is per building by default. You can ask Claude or ChatGPT for a property's net operating income for any month or year, see every property together in the web app, and keep improvements and loan principal out of operating expenses because they sit in their own accounts. DoorKeeping reports your numbers; it does not value your building or give financial advice.
Sources
- IRS, Publication 527, Residential Rental Property (2025), read Oct 29, 2026
Questions
- Does NOI include the mortgage payment?
- No. NOI is figured before principal and interest, so it describes the building regardless of how it is financed.
- Is depreciation an operating expense for NOI?
- No. Depreciation is a tax deduction, not cash spent operating the building, so it stays out of NOI.
- What is a good expense ratio for an apartment building?
- It varies with the building's age, what utilities the owner pays and local taxes. Compare your own building month to month and year to year rather than to a rule of thumb.