What is included in operating expenses?

Property taxes, insurance, utilities, repairs and maintenance, on-site payroll, property management fees, marketing, and administrative costs. Operating expenses exclude debt service, capital expenditures, depreciation, and income taxes.

Should NOI include replacement reserves?

It depends who is asking. Lenders typically underwrite reserves of $250 to $300 per unit per year as an operating expense, which lowers NOI. Sellers usually present NOI before reserves. Neither is wrong, but the two are not comparable, so state which convention you are using.

What is a normal operating expense ratio for multifamily?

Operating expenses generally run 35% to 55% of effective gross income, varying with property age, market, tax burden, and whether utilities are billed back to residents. A ratio materially below 30% almost always signals an incomplete expense load rather than exceptional management.

Net operating income (NOI) calculator

An NOI calculator computes net operating income by subtracting vacancy, credit loss, and operating expenses from gross potential rent and adding other income, producing the figure that drives cap rate, DSCR, and property value.

Gross potential rent (annual)

All units at market rent, fully occupied

Vacancy and credit loss

Economic, not just physical

Other income (annual)

Parking, pet, utility billback, fees

Operating expenses (annual)

Include management fee at market

Number of units

Replacement reserve, per unit

Agency convention is $250 to $300

Net operating income

$389,960

$378,960 after replacement reserves

Gross potential rent: $672,000
Less vacancy and credit loss (7.0%): ($47,040)
Plus other income: $31,000
Effective gross income: $655,960
Less operating expenses: ($266,000)
NOI before reserves: $389,960
Less replacement reserves (40 units): ($11,000)
NOI after reserves: $378,960
Operating expense ratio: 40.6%
Operating expenses per unit: $6,650

Formula

NOI = (Gross Potential Rent - Vacancy - Credit Loss + Other Income) - Operating Expenses

How to read the result

Net operating income is the foundation of commercial real estate valuation. Cap rate, debt service coverage, debt yield, and the sale price itself are all computed from it, so an error here propagates into every other number in a model.

NOI excludes debt service, capital expenditures, depreciation, and income taxes by convention. The treatment of replacement reserves varies: sellers usually present NOI before reserves because it raises value, while lenders almost always underwrite them as an operating expense. When comparing two NOI figures, confirm both sit on the same side of that line.

Common questions

What is included in operating expenses?: Property taxes, insurance, utilities, repairs and maintenance, on-site payroll, property management fees, marketing, and administrative costs. Operating expenses exclude debt service, capital expenditures, depreciation, and income taxes.
Should NOI include replacement reserves?: It depends who is asking. Lenders typically underwrite reserves of $250 to $300 per unit per year as an operating expense, which lowers NOI. Sellers usually present NOI before reserves. Neither is wrong, but the two are not comparable, so state which convention you are using.
What is a normal operating expense ratio for multifamily?: Operating expenses generally run 35% to 55% of effective gross income, varying with property age, market, tax burden, and whether utilities are billed back to residents. A ratio materially below 30% almost always signals an incomplete expense load rather than exceptional management.

Terms used here

Other calculators

This calculator is provided for informational purposes and is not investment, tax, or lending advice. Results depend entirely on the inputs you provide. Lenders re-underwrite net operating income on their own terms, so their figures will differ from these.