Gross vs Net
Income.
The rent check is just the beginning. Here's how to calculate the income that actually matters — your net operating income.
Gross Rental Income
Gross rental income is the total rent collected from all units before any deductions. If you own a duplex where each unit rents for $1,400/month, your gross annual rental income is $33,600.
But gross income is an illusion. No property is occupied 100% of the time, and operating costs eat into that number significantly. Smart investors focus on net operating income (NOI) — the money left after all operating expenses.
Operating Expenses
Every rental property incurs operating costs. Here are the typical expenses you should budget for:
Property Management
8–10% of gross rent if professionally managed. Includes tenant screening, rent collection, maintenance coordination.
Property Taxes
Varies by municipality in PA. Typically 1.5–2.5% of assessed value annually for Northampton and Lehigh Counties.
Insurance
Landlord/rental property insurance covers liability, structure, and loss of rent. Usually $800–$1,500/year.
Maintenance & Repairs
Budget 5–10% of gross rent for ongoing maintenance, repairs, and capital replacements.
Vacancy Allowance
Budget 5–8% of gross rent to account for tenant turnover and vacancy periods between leases.
HOA Fees
If applicable. Some condos, townhomes, and planned communities charge monthly or annual HOA fees.
Sample Calculation: From Gross to Net
Notice that NOI is calculated before mortgage payments. If your annual mortgage is $9,600, your pre-tax cash flow would be $4,796 — yielding a strong cash-on-cash return on your invested capital.
Frequently Asked Questions
Should I factor in mortgage payments when calculating NOI?
No. Net Operating Income (NOI) is calculated before mortgage payments, income taxes, and capital expenditures. This allows you to compare properties regardless of their financing. Your actual cash flow (which includes mortgage payments) is reflected in the cash-on-cash return.
What expenses can I deduct as a landlord?
Most operating expenses are tax-deductible, including property taxes, insurance, management fees, maintenance costs, mortgage interest, and depreciation. See our comprehensive Tax Advantages guide for the full list.
Tim Tepes provides detailed income and expense projections for every investment property. Know your numbers before you buy.