Learning to calculate NOI for your apartment building is fundamental to understanding its value. Net Operating Income drives valuation for all multifamily properties in Los Angeles.

What Is Net Operating Income (NOI)?

Learning to calculate NOI for your apartment building is essential. Net Operating Income (NOI) is the most important number in multifamily real estate. It represents the income your property generates after paying all operating expenses—but before debt service (mortgage payments) and income taxes.

The formula is simple:

NOI = Gross Operating Income − Operating Expenses

For Los Angeles apartment buildings, understanding your true NOI is critical because it directly determines your property’s value and what buyers will pay.

Step 1: Calculate Gross Potential Income (GPI)

Start with what your building could earn if every unit was rented at market rates with no vacancy:

• Add up the monthly rent for all units
• Multiply by 12 for annual income
• Include other income: parking, laundry, storage, late fees

Example: A 10-unit building with average rents of $1,800/month = $216,000 GPI

Step 2: Subtract Vacancy & Credit Loss

No building runs at 100% occupancy forever. Deduct a realistic vacancy factor:

• LA multifamily typically runs 3-5% vacancy
• Also account for collection loss (tenants who don’t pay)
• This gives you Effective Gross Income (EGI)

Example: $216,000 − 5% vacancy ($10,800) = $205,200 EGI

Step 3: Identify Operating Expenses

Operating expenses include everything required to run the building:

• Property taxes (often the largest expense in LA)
• Insurance
• Utilities (if owner-paid: water, trash, gas, electric)
• Repairs & maintenance
• Property management (typically 4-6% of collected rent)
• Landscaping
• Licenses & permits
• Professional fees (accounting, legal)

What’s NOT Included in Operating Expenses:

• Mortgage payments (principal & interest)
• Capital expenditures (roof replacement, major renovations)
• Depreciation
• Income taxes

Step 4: Calculate Your NOI

Example Calculation:

• Effective Gross Income: $205,200
• Property Taxes: $25,000
• Insurance: $8,000
• Utilities: $12,000
• Repairs/Maintenance: $10,000
• Management (5%): $10,260
• Other: $5,000
• Total Expenses: $70,260

NOI = $205,200 − $70,260 = $134,940

Why NOI Matters for LA Apartment Owners

Your NOI determines your building’s value through the cap rate formula:

Value = NOI ÷ Cap Rate

Using our example with a 5% cap rate: $134,940 ÷ 0.05 = $2,698,800

This is why every dollar of NOI matters—at a 5% cap, each $1,000 increase in NOI adds $20,000 to your property value.

Common NOI Mistakes LA Owners Make

• Underestimating expenses: Using last year’s numbers without adjusting for inflation
• Forgetting reserves: Not accounting for future repairs
• Mixing CapEx with OpEx: Including one-time capital improvements in operating expenses
• Ignoring management: Even self-managed buildings should include a management fee for accurate valuation

Quick FAQs

Q: Should I include property management if I manage myself?
A: Yes. Buyers will include it in their underwriting, so you should too. Use 4-6% of collected rent.

Q: How do I know if my NOI is “good”?
A: Compare your expense ratio (expenses ÷ EGI) to market norms. In LA, 35-45% is typical for smaller buildings.

Q: Can I increase my NOI?
A: Yes—by raising rents (within RSO limits), reducing vacancy, adding income streams, or cutting unnecessary expenses.

Want to know what your building is worth based on its NOI? Request a free valuation.

Once you can accurately calculate NOI for your apartment building, you’ll better understand what buyers will pay. Reach out for help analyzing your property’s income and expenses.