NOI not including Mortgage and Property Taxes?

5 Replies

Hey everyone! 

Sorry if this is a boring or simplistic question, I'm wrestling more with understanding the concept or reason for this. I'm currently reading "What Every Real Estate Investor Needs To Know About Cash Flow" by Frank Gallinelli. Currently reading about NOI. I understand how one acquires this number. However, he doesn't include the mortgage and property tax payments as an expense. What benefits or uses does this have in comparison to calculating straight cash flow? He talks a lot about evaluating the "income stream" and viewing rental properties as such. That makes a lot of sense to me, I quite enjoy that. But what use is the NOI without subtracting the necessary costs of the mortgage taxes?

For example: If the NOI for a property is 12,000 per year. What can I do with or compare that number to as opposed to subtracting say 9,000 for mortgage and taxes and knowing that my cash flow per year is 3,000?

I genuinely want to know, not trying to nitpick. NOI seems like a really important metric, I'm just trying to understand why.

Thank you all!

You need to know the net income because that’s the taxable part. If you had cashflow of $1200 but income of $12000 (buried in the mortgage paydown) you could potentially owe more than $1200 in taxes On that $12,000 so you really have negative cashflow. 

Plus the income is the number that really matters more so than the cashflow. Imagine a deal that you can only buy this way. 

$310,000 property, $10,000 down and 10 years of principle only payments of $2500/mo plus $500 for property taxes and insurance that will rent for $3,000/mo  there’s zero cashflow so you don’t buy it? The income is $2500/mo the cashflow is zero  

I have a negative cashflow property that has an annual income of $12,000. In a few years Once the short term loan is paid off the cashflow will be $30,000 year, the same as the income  before interest and loan paydown  


"I genuinely want to know, not trying to nitpick. NOI seems like a really important metric, I'm just trying to understand why."

NOI reflects how much money the property makes before debt (or how much it generates to cover debt). So it is the funding source for your project.

Cash-Cash equalizes things since it reflects the money in your pocket every year and the amount you took out to buy that return.  It allows you to compare the return better to other non-RE investments.

Plus is compensates for low downs (high C-C) and no debt (low C-C).

NOI is simply effective gross minus operating expenses. Property taxes are definitely an op expense, debt service and cap ex are not. NOI is key to figuring your commercial cap rate (NOI/PP.). See how many years it takes operating profit to pay for the asset.

NOI is more of a commercial metric. With residential, cash-flow analysis are more applicable. The CFA definitely imcludes debt service.

@Eric Lilly , here are the list of steps to analyze cash flow from NOI, to before tax and after tax. I only do CRE, so you can skip any steps that do not apply. Hope this helps!

1 Potential Rental Income 

2 − Vacancy & Credit Losses 

3 = Effective Rental Income 

4 + Other Income (Collectible) 

5 = Gross Operating Income

6 − Operating Expenses 

7 = NET OPERATING INCOME 

8 − Interest – 1st Mortgage

9 − Interest – 2nd Mortgage 

10 − Participation Payments 

11 − Cost Recovery – Improvements 

12 − Cost Recovery – Personal Property 

13 − Amortization of Loan Fees/Costs

14 − Leasing Commissions 

15 = Real Estate Taxable Income 

16 Tax Liability (Savings) at_____%

17 NET OPERATING INCOME (Line 7) 

18 − Annual Debt Service 

19 − Participation Payments 

20 − Leasing Commissions 

21 − Funded Reserves 

22 = CASH FLOW BEFORE TAXES 

23 − Tax Liability (Savings) (Line 16) 

24 = CASH FLOW AFTER TAXES