Calculating NOI .......mystery?

After reading tens of sites covering the calculation of NOI, there seems to be a lot of wiggle room in determining the inputs!

Knowing that this is one of the “most important” numbers investors use really makes it critical know the correct calculation and be able to defend why one uses each revenue soruce.

I got the big picture – Gross Income - Operating Expense = NOI

The question come from determining the INCOME number. I often see examples that use late fees, application fees, etc… along with using scheduled rent minus vacancy & collection loss???

BUT, it seems to me that late fees, application fees, & move-in administrative fees are not predictably reoccuring sources so why should they be used ever? I would think one should only use sched rent minus vac & collection loss plus parking, storage, vending & laundry fees to be most accurate.

I certainly would appreciate a full discussion on the Income & Expense items used by the pros to calculate NOI and why maybe or maybe not using late fees and others should be used.
Thanks…that was a mouth full.

I will let the experts define NOI. I do want to point out a bit common sense.

  1. If you use gross scheduled rent for the year you are assuming zero vacancies. Pretty normal.
  2. Then you include in the expense category an allowance for vacancies. You are guessing as you really do not know how often you will have a vacancy. Over time and using industry norms you can come up with a figure that is pretty accurate for the property and your management.
  3. If you believe there will be vacancies and you believe the average represents a good ‘estimate’, it seems reasonable that you would have fees associated with renting a vacant unit. How or why you should include fees in the income column can be debated. My point is you should use the same level of logic for vacancies and for finding a tenant.

I assume you are figuring a pro forma from reading your post?? If this is the type of property where those things will provide a little extra income, then you should include them. Just put them under misc income. Be careful with pro formas…hopefully you have access to the current owner’s operating records as well.

I just had to bill a guy $30 extra on his rent because he didnt get a utility switched over quickly. That $30 is now income and will offset the expense of me paying that bill.

In the end, its like you said, NOI is Income minus operating expenses. Most people do not include the cost of financing in NOI either. My actual spread sheets for each property do not have a place for interest or loan payments.

Most people do not include interest expense in NOI because NOI specifically excludes finance expense. NOI is designed to eliminate or exclude interest costs so two buildings can be compared independent of what a buyer or owner chooses in terms of funding. A cash buyer and a buyer who uses an 80% loan should both end ups with the same NOI for a specific building.

NOI is all about what the property does (income and expenses) and not how an investor chooses to fund the purchase.



You’ve hit on one of the classic conundrums in commercial real estate. Five investors could look at the same deal and come up with 5 different NOI’s, and they could ALL be right.

The key is in which NOI you want, which depends on whether you’re buying or selling.

If you’re selling, the Pro Forma method as described above is typical, designed to portray the property in it’s best light. Using the Gross Potential Income (GPI) less and arbitrary vacancy and collection loss (usually 5%-10%) gives a hypothetical best case revenue. This may or may not (usually not) reflect the current rent roll.

Expenses are often stated as a percentage of gross revenue depending on property type–which won’t be the actual expenses at all. More professional brokers (e.g. CCIM methodology), calculates expenses from actual past performance, adjusted for inflation, and “normalized” to exclude any of the current owner’s non-property specific expenses. This is closer to reality than pro forma, but the NOI is still inherently incorrect due to the revenue assumption. (Also, variable expenses are rarely adjusted from actual occupancy vs. “potential” occupancy, understating the expenses.)

But this does produce the best possible NOI for the property, and many investors (or brokers) don’t dig any further. If I’m a seller I’ll put it out like this every time. If the buyer asks for actual numbers, I’ll supply them, but they have to ask.

If you’re buying, then you want to know what the NOI will be in the first year you own the property. You can work with the pro forma numbers, but need to substitute the actual revenue from the current rent roll instead of GPI (there is no V&C loss because the revenue is actual cash received).

Be aware that the revenue may not jive with the current rent roll, especially if there is a long gap between the end of the reporting period (say year-end) and the review (say mid-year following). This can be cured with a trailing twelve statement the most recent 12 months of actual operating results. (Many owners us e Quick Books and this function is available int he software.) (also see my article “Financial Due Diligence” at )

Expenses are normalized (i.e. adjusted to reflect how you will operate the property, see below) from the most current statements (preferably derived from 2 years performance), verify the major expenses (e.g. utilities, insurance, property taxes, etc.). Deduct this from the actual revenue and you have the NOI known as the “going-in” projection of NOI. (Never deduct debt service, only operating expenses.)

This is the number I want to use for establishing the asking cap rate, and for my own valuation. (See my article “What’s it Worth” at If you don’t use the current rent roll and actual expenses, you’re paying the seller for income that doesn’t currently exist, and that you must produce in the future.

The difference between investors is in how they operate the property (e.g. fee managed or self-managed; maintenance outsourced or owner-performed; with or without CapEx reserves) ) which affects the projected NOI. Note: for loan underwriting a management fee is always deducted, whether or not self-managed.

So your initial impression that there is a lot of wiggle room in calculating NOI is correct. The key is to start from the real numbers, and adjust the expenses for the way you will operate the property and structure the deal.

Now, have I put that in terms no one can understand? :wink:


Sounds clear to me Ray.

NOI detailed

Thank you Ray for jumping in on this subject. It certainly seems to be one of the CORE ideas in investment R.E.

Now I think I fully understand the idea of evaluating the property as it IS producing and really digging for the true operating numbers rather than pro-forma, pie-in-the-sky numbers.

I suspect the final negotiations are the most difficult to reconcile the sell/buyer differences. That’s where the real art/talent of the deal meets the road.

Out of curiosity, when you are selling a property, do you make the buyer show you the numbers that they used to arrive at a price that will certainly be different than what you expect?

Thanks for your comments on this one - that was a lot of ground covered.

“Out of curiosity, when you are selling a property, do you make the buyer show you the numbers that they used to arrive at a price that will certainly be different than what you expect?”

Answer: Sometimes, but not often. It depends on the circumstances. If the buyer comes up with an offer that is way below the asking price I may ask what the basis is for the valuation. More often I just don’t respond or counter. That sends a stronger message than any discussion of the merits. But I also make a practice of disclosing more than most sellers in the initial offering package. This takes the bullets out of the gun if they’re trying to use due diligence to beat me down on price (a common practice).

Conversely, I rarely have a seller ask for (or care about) my projection either. The discussion usually centers on the back and forth of counter offers, and my goal (buying and selling) is to find what I call “the mutual level of pain”. A lawyer told me once that if the seller thinks he’s selling too cheap, and the buyer thinks he’s paying too much, then it’s probably a fair deal. I’ve found that to be true. The mutual level of pain is a price that a seller will take and a buyer will pay, and a deal is struck.

Another good question you asked in your original post I forgot to address:

“BUT, it seems to me that late fees, application fees, & move-in administrative fees are not predictably [recurring] sources so why should they be used ever? I would think one should only use sched rent minus vac & collection loss plus parking, storage, vending & laundry fees to be most accurate.”

This is most common in multi-family properties. Generally if you’re using income capitalization for valuation then you cannot capitalize non-recurring income at the same rate as rental income. I chuckle at owners using late fees as part of the income stream… to me that’s a red flag for a poor rent roll, poor management, or both. Either way it should not be capitalized because with proper management it should be a small annual entry, and is often offset by collection loss. Likewise, high admin and app fees can be indicative of high turnover rates, another red flag.

Ditto for income derived from other property, like vending and laundry income. The income is based on rapidly depreciable equipment and/or vendor splits for leased equipment. In either case the equipment does not have the same asset life as the building. I routinely omit laundry and vending income from the capitalized income stream.

Parking fees depend on the standards of the market and comp set amenities, as well as the parking facility and how fees are administered (e.g. contract, metered, etc.). In many cases it would be considered part of the permanent income stream because the parking facility has a similar asset life and may enhance desirability of the space. For example, downtown office buildings may have contracts with off-site parking facilities which are then sub-leased (or included) as a perk for tenants in the space lease. This can add significant value because downtown parking is notoriously difficult to provide and can make or break a building’s market position.


Thanks for the detailed comments…covers more angles that I had not thought about. I really appreciate the time you’ve taken to respond to these questions and the execellent articles in the how-to section you have written. I’ll be checking back for more of your posts. BB


If I can add one more comment to this. . .

You referenced getting the true operating numbers from a property, not relying the “Pie in the sky” numbers. Another thing that will help you in doing your due diligence is to become acquainted with what is acceptable and what is out of line for a property as far as expenses are concerned. I am a Certified General Appraiser and whenever I appraise a multifamily property I have to see three years of true expense statements (if available). Whenever you see these types of statements, think about what those costs add up to on a per unit basis. As you view property after property, I think you will start to get acquainted with where these expenses should be. This will help you in two ways: It can indicate to you that I property is very poorly managed or has some sort of problem. Or, if this is an expense that can be remedied (i.e. terribly expensive heating bills) you may be able to invest some money in the property which will alleviate the expense somewhat and add value to your property.

To give you an example, I appraised a property where the garbage removal was something like $1000 per unit per year (It was 39 units). This was way out of line and when I questioned the property manager she said that there were problems with people dumping things in their dumpster and leaving items behind on the street and in units. I think when you become more and more sensitive to these expenses, you will become more intuitive about what the NOI should be and you’ll find that you are able to make better decisions!

Hope that helped.