How do you Cap rate?

[Marco Morkous]

When calculating your NOI for cap rate- Do you guys include your monthly mortgage on the property as an expense? I've talked to people who do and people who don't.

[Immanuel Sibero]

You can use the name itself as a guide to determine whether or not to include a particular cash inflow/outflow item. The O in NOI is short for "Operating" so we can, in theory, say that any cash inflow/outflow items necessary to the proper day-to-day "operation" of the property should be included in NOI. As Michael pointed out above, a mortgage should NOT be included. It shouldn't be included because a mortgage is not necessary to properly operate a property. Another example would be capital expenditures which can usually be delayed without hindering the proper operation of a property.

On the other hand, expenses such as repairs/maintenance, insurance, property taxes, salary, etc. are very necessary to the operate the property and therefore are very much part of Net "Operating" Income.

Cheers... Immanuel