| Detail | Explanation |
|---|---|
| Formula | Effective gross income minus operating expenses |
| Includes | Rent, reimbursements, parking, laundry, and other property income |
| Excludes | Debt service, depreciation, capital improvements, and income taxes |
| Feeds | DSCR, debt yield, cap rate, and appraised value |
How is NOI calculated?
Begin with gross potential rent, the rent the property would collect fully leased at current rates. Subtract vacancy and credit loss, then add other income such as parking, storage, or expense reimbursements. That total is effective gross income. Subtract operating expenses, which include property taxes, insurance, utilities, repairs and maintenance, payroll, and management.
Items that are not operating costs stay out of NOI. The mortgage payment is a financing cost, depreciation is a tax concept, and a roof replacement is a capital expense. Mixing any of these into NOI makes the figure useless for comparing properties or sizing debt.
NOI = gross potential rent - vacancy and credit loss + other income - operating expenses
Worked example
This hypothetical 80-unit apartment property shows the calculation from the owner's statement, then the adjustments a lender commonly makes.
| Line item | Amount |
|---|---|
| Gross potential rent | $1,000,000 |
| Less vacancy and credit loss at 5% | $50,000 |
| Plus other income | $30,000 |
| Effective gross income | $980,000 |
| Less operating expenses | $330,000 |
| NOI on the owner's statement | $650,000 |
| Lender adds management fee at 3% of effective gross income | $29,400 |
| Lender adds replacement reserves at $250 per unit | $20,000 |
| Underwritten NOI | $600,600 |
Why does the lender's NOI differ from mine?
Underwriters build their own NOI from the rent roll and the trailing 12 month operating statement. They typically apply a market vacancy factor even if the building is full, charge a management fee even if the owner self-manages, and deduct replacement reserves. They may also mark above-market leases down, drop one-time income, and gross up taxes that will reset after a sale.
In the hypothetical above, those adjustments cut NOI by $49,400. On a $7,000,000 loan at 7.00% with a 30-year amortization, annual debt service is $558,854. Coverage falls from 1.16x on the owner's figure to 1.07x on the lender's, which can mean a smaller loan. The DSCR calculator shows the effect for any NOI you enter.
How NOI drives value and loan size
- Value: appraisers usually capitalize NOI at a market cap rate, so a lower NOI lowers value
- Coverage: DSCR divides NOI by the loan payment
- Debt yield: NOI divided by the loan amount sets a ceiling that rate cannot change
- Timing: bridge and construction lenders also underwrite a projected stabilized NOI, then size the permanent exit to it
Preparing NOI for a loan request
Give the lender a current rent roll, 2 to 3 years of operating history, a trailing 12 month statement, and a budget. Flag nonrecurring expenses and explain any income the lender might question. A clean, reconciled package keeps underwriting from defaulting to conservative assumptions.
When the numbers are assembled, send the deal to Capital Partners with the rent roll and operating statements attached.
Common questions
Does NOI include the mortgage payment?
No. NOI is measured before debt service so it describes the property alone. Lenders compare NOI to the payment separately through the debt service coverage ratio.
Are capital expenditures part of NOI?
Major capital items such as roofs, parking lots, and unit renovations are excluded. Lenders often deduct a replacement reserve below NOI or inside underwritten NOI to account for them.
Is NOI the same as cash flow?
They differ. Cash flow is what remains after debt service, capital spending, and reserves. NOI comes before all of those.
Which NOI does a lender use, trailing or projected?
Permanent lenders mostly underwrite in-place income supported by the trailing 12 months and the rent roll. Bridge and construction lenders also look at a projected stabilized NOI to judge the exit.
Send this deal to a principal
Share the basics now. A principal responds within 1 business day, and you can send the full package after the first conversation.