Scheduled rent minus vacancy, plus other income, minus expenses
Net operating income is the unlevered cash a rental earns before debt service, capital expenditure, and income tax. Vacancy on this page is applied to scheduled rent only, then other income is added. Some underwriters apply vacancy to gross potential income including other income. Cap rate takes NOI as an input. Rental yield applies occupancy and costs as a yield. Cash-on-cash uses levered cash flow.
Vacancy loss = annual scheduled rent × vacancy percent
Effective gross income = annual scheduled rent − vacancy loss + other income
NOI = effective gross income − operating expenses
Example
Monthly rent of $6,000 is $72,000 a year. A 10% vacancy is $7,200. Adding $1,000 of other income and subtracting $15,000 of operating expenses leaves NOI of $50,800. Applying vacancy to rent plus other income on the same numbers would be $50,700.
What NOI leaves out
Mortgage payments, capital expenditure, depreciation, and income tax stay out of NOI. Negative NOI is allowed when expenses exceed income. Enter replacement reserves only if you treat them as operating expenses.