NOI and Cap Rates: The Starting Point
Net operating income (NOI) is the property’s income after ordinary operating expenses, but before debt service and income taxes. A capitalization rate relates NOI to property value.
Calculate NOI
Effective gross income minus operating expenses equals NOI. Use realistic vacancy, collections, repairs, management, taxes, and insurance assumptions.
Calculate the cap rate
Cap rate = annual NOI ÷ purchase price. A property with $112,500 in NOI and a $1,500,000 price has a 7.5% going-in cap rate.
Know what cap rates leave out
Cap rates do not directly show loan payments, initial cash invested, major future capital costs, or the quality of a tenant’s lease.
For a more complete investment analysis, the book examines debt, cash-on-cash returns, lease risks, capital expenditures, and due diligence in later chapters.
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