How to Calculate NOI for a Multifamily Property

The NOI Formula

Net operating income is calculated in two steps: first, derive effective gross income from gross potential rent; second, subtract all operating expenses. The result is the property's pre-debt, pre-tax income from operations.

Each of these components requires careful independent verification. The rest of this guide walks through each line item, what typical values look like, and where brokers most often manipulate the math.

Step 1: Gross Potential Rent

Gross potential rent (GPR) is the theoretical maximum rental income if every unit were occupied at market rate for all 12 months. It is calculated by multiplying each unit type by its market rent and summing across the entire building.

A note on in-place vs. market rents: GPR should use market rents, not in-place rents, when calculating stabilized NOI. If in-place rents are below market, the gap is the “loss to lease” — upside that exists on paper but has not yet been captured. Some brokers blend in-place and market rents to inflate GPR; make sure you know which assumption is being used.

Step 2: Vacancy and Credit Loss

No property operates at 100% occupancy year-round. Vacancy and credit loss represents two separate risks that are typically combined into a single deduction:

• Physical vacancy — units that are empty and not generating rent, including turnover time between tenants, renovation downtime, and chronic vacancies in weaker markets.
• Credit loss (bad debt) — rent that is owed but not collected due to non-paying tenants, write-offs, or concessions such as free rent months.

Combined vacancy and credit loss for stabilized multifamily typically runs 5–10% of GPR. Brokers often use 3–5% in their pro formas, especially for properties that happen to be 97%+ occupied at the time of sale. Use the submarket's long-run average vacancy rate, not the current snapshot, when underwriting a deal you plan to hold for years.

Step 3: Other Income

Other income (also called ancillary income) captures revenue streams beyond base rent. Common sources include:

• Parking fees (assigned spots, garages, carports)
• Laundry income (owned machines or a laundry lease)
• Pet fees and pet rent
• Storage unit rentals
• Late fees and application fees
• RUBS (ratio utility billing system) income where tenants pay a share of utilities
• Short-term or furnished unit premiums

Other income is often highlighted in OMs as an upside opportunity. Be conservative: include only income that is already being collected consistently, and separately model potential new income streams as upside in your return analysis rather than baking them into base NOI.

Step 4: Operating Expenses

Operating expenses are all costs required to operate and maintain the property, excluding debt service, income taxes, depreciation, and capital expenditures. The following expense categories should be present in any thorough underwrite:

• Property management fees — typically 6–10% of collected revenue for third-party management. Always underwrite a market-rate management fee even if the current owner self-manages, because you will eventually sell to a buyer who prices in professional management.
• Property taxes — verify the current assessed value and applicable tax rate. In many jurisdictions, a sale triggers a reassessment at the purchase price, which can significantly increase taxes. Model your own tax figure based on the expected assessed value post-close, not the seller's current tax bill.
• Insurance — obtain quotes or use market rates for the property type and location. Insurance costs have risen substantially since 2021 in many states, particularly in coastal and storm-prone markets.
• Utilities — includes common area electricity, water/sewer for common areas, trash removal, and any owner-paid utilities in master-metered properties. Compare to actual bills.
• Repairs and maintenance — day-to-day and routine maintenance costs. For a stabilized property expect $500–$1,200/unit/year depending on age and condition. Older properties trend toward the high end.
• Landscaping and grounds — often underestimated on larger properties. Get actual vendor quotes during due diligence.
• Payroll and on-site staff — includes resident managers, maintenance technicians, leasing staff, and employer payroll taxes and benefits. Larger properties (50+ units) typically require dedicated on-site staff.
• Administrative and professional — accounting, legal, software subscriptions, office supplies for property operations.
• Marketing and leasing — listing fees, photography, advertising, and tenant screening costs.
• CapEx reserve — while technically not an operating expense on the income statement, smart underwriters include a CapEx reserve of $200–$500/unit/year when calculating economic NOI to account for ongoing capital needs. This is especially important for properties built before 1990.

What Is NOT Included in NOI

NOI is a pre-financing, pre-tax metric. The following items are explicitly excluded:

• Mortgage principal and interest payments
• Income taxes on property earnings
• Depreciation and amortization
• Capital expenditures (roof replacement, HVAC upgrades, parking lot resurfacing)
• Loan origination fees
• Tenant improvement allowances

This is why NOI cannot be used in isolation to evaluate a leveraged deal. A property with strong NOI may have terrible cash flow if it carries heavy debt service or requires major near-term capital expenditures.

Pro Forma NOI vs. Trailing NOI

Most OMs present two NOI figures side by side. Understanding the difference is critical to evaluating what you are actually buying:

• Trailing 12-month (T12) NOI — the actual income and expenses from the past 12 months of operation. This is ground truth and the starting point for any underwrite. T12 NOI captures what the property actually earned, including real vacancy, real maintenance costs, and real concessions.
• Pro forma NOI — a forward-looking projection built on assumptions about future rents, occupancy, and expenses. Pro forma figures are constructed by the broker to maximize the implied value of the property. They typically assume full occupancy at market rents, below-market expense ratios, and sometimes the elimination of one-time costs.

Expense Ratio Benchmarks

A quick sanity check on any NOI calculation is the expense ratio: total operating expenses divided by effective gross income. Industry benchmarks by property type:

If a broker presents an OM showing a 28% expense ratio on a 1970s Class C building, something is missing from the expense column — almost always management fees, adequate maintenance reserves, or real property taxes. Run the math and find what was omitted before underwriting the deal.

How to Sanity-Check Broker NOI Figures

The fastest way to stress-test a broker NOI is a five-step review:

1. Calculate your own GPR from the rent roll using verified market rents — not the broker's rent comp package.
2. Apply a realistic vacancy rate based on the submarket's historical average, not current occupancy.
3. Add other income conservatively using only already-collected ancillary revenue shown in the T12.
4. Rebuild operating expenses from scratch, adding a market-rate management fee even if the owner self-manages, and verifying property taxes at post-sale assessed value.
5. Check the expense ratio. If your reconstructed ratio is materially higher than the broker's figure, you have found where the inflated NOI came from.

A Complete NOI Example