What is NOI?+
Net Operating Income (NOI) is the total income a property generates after operating expenses but before debt service and capital improvements. Formula: NOI = Gross Income (rent + other income) − Operating Expenses. It's the foundational metric for cap rate, valuation, and refinancing.
What's included in operating expenses?+
Property tax, insurance, property management, repairs and maintenance, landscaping, utilities you pay (water/sewer/trash typically), HOA fees, vacancy allowance, and a small admin/legal line. Do NOT include: mortgage payments (P&I), capital improvements, depreciation, or owner draws.
What's the difference between expenses and capex?+
Operating expenses are recurring costs to keep the property running (insurance, taxes, maintenance under ~$500 per repair). Capital expenditures (capex) are improvements or replacements that extend useful life (new roof, HVAC, water heater, major renovations). Capex goes on the balance sheet and is depreciated; it doesn't reduce NOI.
Should I include a vacancy allowance even if I'm fully occupied?+
Yes — always 5–8% for small multifamily. The day a tenant gives notice, you're underwriting the next 30-60 days of vacancy plus turnover costs. Using current 100%-occupied numbers is best-case underwriting. NOI based on fully-occupied gross is misleading for valuation purposes.
What's a good operating expense ratio?+
For small multifamily, opex usually runs 40-55% of gross rental income. Higher than 55% suggests either a tough property (deferred maintenance, high tax jurisdiction) or your numbers include capex you shouldn't. Lower than 40% suggests you're missing expenses — most commonly property management, repairs reserve, or vacancy allowance.
Why does NOI matter for valuation?+
Commercial real estate (5+ units) is valued on the income approach: Property Value = NOI ÷ Cap Rate. Every $1,000 of recurring NOI added is worth roughly $12,000-$15,000 in property value at typical multifamily cap rates. This is why operational improvements compound — raising NOI by $10k forever is worth $130k+ of value.
How does PM cost affect NOI?+
Property management is typically 8-10% of gross income for small multifamily. Even if you self-manage, you should underwrite a market-rate PM line, otherwise you can't compare your deal to a deal you'd hire PM for. Self-managing is a labor decision; the financial analysis should be PM-included.
What's the difference between gross income and effective gross income?+
Gross potential income (GPI) is what you'd collect if every unit were rented at market rate, 100% of the time. Effective gross income (EGI) is GPI minus vacancy and credit loss allowance. Most operators use EGI as the income line in NOI calculations, since vacancy is inevitable.
Trailing 12 vs pro forma NOI?+
Trailing 12 (T-12) is the actual NOI based on the last 12 months of bookkeeping. Pro forma is the projected NOI under specific assumptions (market rents, planned improvements, etc.). For valuation and lending, T-12 is the gold standard. For value-add planning, you compare T-12 vs achievable pro forma to see the upside.
Why is my NOI different from what the broker showed?+
Broker NOI typically overstates because they pull from owner-provided expense statements that often: (1) exclude property management, (2) use 0% vacancy, (3) hide capex as expenses, (4) understate insurance, (5) miss utility lines. Recalculate everything from scratch using the rent roll plus market expense ratios.