Is vacancy an operating expense or a loss of income?
Vacancy is a reduction of income, not an operating expense. It comes off gross potential rent first, producing effective gross income, and operating expenses are then subtracted from that. The order matters because a percentage management fee is charged on collected rent, not on rent you never collected.
Why it matters
Treating vacancy as an expense produces the right NOI by accident and the wrong management fee on purpose. It also hides the number that matters when you are underwriting: what share of the rent roll you actually expect to collect.
What it does to the number
Setting vacancy to 0% because the unit is currently occupied. There is no such thing as a 0% vacancy rental over a hold period — turnover alone costs weeks. This tool defaults to 5% and will not let it be nothing, because a 0% assumption is how a deal that does not work gets approved.
Worth knowing
- Gross potential rent − vacancy and credit loss = effective gross income.
- 5% is the default here. Weak submarkets and high-turnover units run higher.
- Vacancy covers credit loss too — rent billed and never collected.
- A management fee is charged on collected rent, so the vacancy haircut has to come first.
The rule this calculator locks
NOI is built from EFFECTIVE gross income: vacancy is a reduction of income, never an operating expense.