![]() ![]() Vacancy Loss = (based on 5% of the potential rental income) Now let’s look at how to calculate the NOI of a single-family rental home using the above elements: The reason variable expenses like these are not included in NOI is to provide the investor with a clear idea of the amount of income a property could generate compared to the cost of operating the property. Items such as income tax paid by an individual investor, debt service and mortgage interest, capital expenses, and depreciation are excluded from the NOI calculation. Remember that NOI does not take into account operating expenses and costs that may vary from one investor to the next. NOI is calculated by subtracting the property operating expenses from the gross operating income. Normal operating expenses include property management fees, property taxes, insurance, and maintenance and repair expenses. Total of effective rental income plus other rental income.Ĭosts directly related to operating the property to collect the fair market rent and maintain the property value. Income that is not part of the regular monthly or base rent, such as additional pet rent, roommate rent, appliance rent, laundry for apartment buildings, or late fees. The amount of rental income a landlord can reasonably expect to collect is calculated by subtracting vacancy loss from the potential rental income. Some real estate investors use a pro forma vacancy rate equal to 5% of the potential rental income. The total amount of income a property would generate if it was occupied 100% of the time and leased at a fair market rent compared to comparable properties.Īmount of potential rental income lost due to vacancy caused by tenant turnover or a tenant being evicted due to non-payment of rent. These are the different elements used to more accurately calculate NOI:
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