Calculating NOI question:

[Noel Pingatore]

Hello - I'm having trouble understanding why we don't include the mortgage payment in the monthly expenses when we calculate the NOI. This is the formula as I understand it. NOI = annual rental income - annual expenses( excluding mortgage payment) Is this correct?

Every time I do this calculation I get a large NOI, or so it seems to me. So I think I must be missing something.

Any clarifications or insights would be greatly appreciated. 

Thank you 

[Greg Scott]

Yes, that is correct.  

Every owner might finance the property differently. Some might pay cash. Some might have seller financing. Some might use agency debt or other mortgage. NOI's primary use is a measure of the value of the property. If the valuation changed depending on the financing used, it would become an useless measure for value. Because NOI is a measure of value, it helps for calculating equity gain of a project, but does not tell you total return. People also look at cash-on-cash returns which does take into account financing.

FWIW, I see a lot of people on BP use NOI and Cap Rate when discussing single family, duplexes, triplexes and quads. NOI and Cap rate are irrelevant to those types of properties because they are not used to calculate value of the property. Those types of properties are all valued using the Comparative Market Analysis (comps) approach.