What Is Net Rental Income?
Net rental income is what hits your bank account from rent — after empty units and non-payment, but before operating expenses. A duplex with $28,800 in gross rental income and 6% vacancy has $27,072 in net rental income. That's the number you subtract operating expenses from to get NOI. It sits between gross rental income (the ceiling) and NOI (income after expenses). Budget for 5–10% vacancy in most markets. Sellers often skip it — they show gross and hope you don't notice. Verify the vacancy rate with local data. See the Deal Analysis guide for the full income waterfall.
Net rental income (also called effective gross income or EGI) is gross rental income minus vacancy loss and credit loss — the rent you actually collect before subtracting operating expenses. It's the true top line. NOI = Net Rental Income − Operating Expenses.
At a Glance
- What it is: Gross rental income minus vacancy loss and credit loss — the rent you actually collect.
- Why it matters: The true top line before operating expenses. NOI = Net Rental Income − OpEx.
- Key distinction: Gross rental income = potential. Net rental income = actual collection. NOI = after operating expenses.
- Typical vacancy: 5–8% in stable markets (Memphis, Cleveland, Indianapolis); 3–5% in hot markets (Austin, Phoenix); 8–12% in soft markets.
- Reality check: Budget for 10–11 months of rent. Never assume 100% collection.
Net Rental Income = Gross Rental Income - Vacancy Loss - Credit Loss
How It Works
The formula. Net Rental Income = Gross Rental Income − Vacancy Loss − Credit Loss. Vacancy loss is rent lost to empty units — turnover, slow leasing, or a unit that's hard to rent. Credit loss is rent lost to late payments, concessions, bad debt, and eviction shortfalls. Both shrink the top line. What's left is what you actually collect.
Why it matters for NOI. NOI = Net Rental Income − Operating Expenses. Net rental income is the numerator for that subtraction. Get it wrong and NOI is wrong. Cap rate and DSCR follow. A $2,000 error in net rental income at a 6% cap rate swings property value by $33,333. Verify the vacancy rate. Use market data, not seller optimism.
Vacancy by market. Vacancy rate varies. Memphis: 6%. Cleveland: 8%. Indianapolis: 6%. Phoenix: 5%. Austin: 4%. Denver: 5%. Class A in growing markets: 3–4%. Class C in declining markets: 10–12%. Pull local data. If the seller used 3% vacancy on a Class C property in a soft market, your net rental income is overstated. Rerun the numbers.
Credit loss. Often 1–2% of gross. Late payments that never get collected. Concessions (first month free, $200 off) that reduce effective rent. Evictions where you recover less than owed. Bad debt write-offs. It's smaller than vacancy but real. Budget for it. Some investors lump it into vacancy for simplicity — 7% "vacancy and credit loss" instead of 6% + 1%. Either way, net rental income reflects what you'll actually collect.
Real-World Example
Cleveland 3-bedroom SFR.
Gross rental income: $1,350/month × 12 = $16,200/year. Vacancy rate in Cleveland: 8%. Vacancy loss: $1,296. Credit loss: 1%. Another $162. Net rental income: $16,200 − $1,296 − $162 = $14,742.
Operating expenses: $6,048 (property taxes, insurance, management 8%, maintenance, reserves). NOI: $14,742 − $6,048 = $8,694.
Net rental income of $14,742 becomes $8,694 in NOI after operating expenses. If the seller had used 4% vacancy instead of 8%, net rental income would've been $15,552 — $810 higher. NOI would've been $9,504. At a 6% cap, that's a $13,500 valuation swing. The vacancy rate assumption drives everything.
Pros & Cons
- Reflects reality — what you'll actually collect, not the ceiling.
- Feeds NOI directly — get net rental income right and NOI follows.
- Forces vacancy discipline — you can't pretend 100% collection.
- Comparable — you can benchmark vacancy by market and property class.
- Requires a vacancy assumption — get it wrong and the number is wrong.
- Credit loss is harder to model — often estimated at 1–2%.
- Sellers skip it — they show gross rental income and hope you don't subtract vacancy.
- Market-dependent — vacancy varies by location, class, and cycle. One size doesn't fit all.
Watch Out
- Vacancy underestimate: The #1 error. Sellers use 3% when the market runs 7%. Budget 5–8% in stable markets, 8–10% in softer ones. If your deal only works at 3% vacancy, it doesn't work.
- Pro forma vs. actuals: A seller's "stabilized" net rental income assumes projected rents and low vacancy. Pull actual rent rolls. Check vacancy rate data for your zip and property type. Census data includes owner-occupied — your Class C rental has a different profile.
- Concession creep: First month free, $100 off for signing — those reduce effective rent. They're credit loss. If the seller filled units with concessions, your in-place rent might not reflect "market." Model the true effective rent.
- Economic vacancy: A unit can be "occupied" but not producing full income — tenant behind on rent, below-market lease. Physical vacancy is easy to see. Economic vacancy is harder. Both reduce net rental income.
Ask an Investor
The Takeaway
Net rental income is gross rental income minus vacancy and credit loss — the rent you actually collect before operating expenses. NOI = Net Rental Income − OpEx. Get the vacancy rate right. Use market data, not seller optimism. Budget for 10–11 months of collection. Every dollar of net rental income you lose to bad assumptions flows through to NOI, cap rate, and valuation. See the Deal Analysis guide for the full underwriting framework.