Net Operating Income (NOI) Calculator

Value equals NOI divided by cap rate, so the reciprocal of the cap rate is the multiplier on every dollar of operating income.

At a 6% cap rate that multiplier is 16.7. Cut $5,000 a year from the insurance premium and the property is worth about $83,000 more. Raise rents by $50 a month across twenty units and NOI rises by $12,000, adding roughly $200,000 of value.

This is the entire logic of value-add commercial investing. You are not buying the current income; you are buying the ability to raise NOI and capture a multiple of the increase.

It also explains why owners resist expenses that look trivial. A $3,000 recurring cost is not $3,000 — at a 6% cap it is $50,000 of value, permanently.

And it works in reverse. Deferred maintenance that eventually forces higher recurring repair spending destroys value at the same multiple.

The capital expenditure exclusion is the one that causes trouble. It is correct — capex is lumpy and would make NOI meaningless year to year — but it means NOI overstates what the property puts in your pocket. Sophisticated buyers subtract a capital reserve, often $250 to $400 per unit per year, before applying a cap rate.

Included: property tax —

usually the largest single line, and it often resets on sale — check whether the seller's figure will survive your purchase.

Included: insurance —

and rising sharply in coastal and wildfire-exposed markets, sometimes enough to change a deal on its own.

Included: management —

4% to 10% of EGI. Include it even if you self-manage, or you are valuing your own unpaid labour at zero and overstating NOI.

Included: routine maintenance —

repairs, turnover, landscaping, cleaning, pest control.

Excluded: debt service —

the point of NOI is to be financing-neutral.

Excluded: capital expenditure —

a new roof is a capital item, not an operating expense — though it is very much a real cost and comes out of your cash.

Excluded: depreciation —

an accounting entry, not cash.

Excluded: income tax —

it depends on the owner, not the property.

Because value is a multiple of NOI, there is a strong incentive to present it favourably. The common techniques are well known and worth checking every time.

Understated vacancy is the first. A pro forma showing 3% vacancy in a market running 8% adds NOI that does not exist. Ask for the actual rent roll and twelve months of collections, not the projection.

Omitted management fees are the second. A seller who self-manages may show no management line at all, which quietly adds 8% of EGI to NOI and, at a 6% cap, over a hundred thousand dollars of apparent value on a modest property.

Below-market maintenance is the third, and it usually pairs with deferred maintenance you will inherit. Unusually low repair figures are a signal to inspect harder, not a sign of good management.

"Pro forma" NOI based on rents nobody is currently paying is the fourth. It may be achievable, but it is a plan rather than a fact, and you should not pay today for income you have to create.

The defence is the same in every case: underwrite on trailing twelve-month actuals, verify property tax at the reassessed rate, get your own insurance quote, and include management whether or not you intend to pay someone.

Operating expenses divided by effective gross income gives a ratio that is quick to compare and hard to fake.

For multifamily, 35% to 50% is the typical band, varying with age, market and whether utilities are owner-paid. Newer properties in low-tax markets sit at the bottom; older properties with owner-paid heat sit at the top.

A ratio well below 30% should prompt questions rather than enthusiasm. Either something is genuinely unusual, or an expense category is missing.

Above 55% suggests either an operational problem worth fixing — which is an opportunity — or a structural cost like a very high tax assessment that you will inherit.

The ratio is most useful as a comparison against similar properties in the same market. Across markets it says more about local property tax regimes than about how well a building is run.