How do you calculate the NOI?

Add up all rental and other income for the year, subtract an allowance for vacancy and credit loss, then subtract every operating expense: property taxes, insurance, HOA dues, owner-paid utilities, maintenance, capital reserves and management. What is left is net operating income. Mortgage payments, depreciation and income tax stay out.

On a $300,000 house renting for $2,500, scheduled income is $30,000. After 5% vacancy, collected income is $28,500. Taxes of $3,600, insurance of $1,500 and 18% of collected income for maintenance, reserves and management add up to $10,230 of expenses. NOI is $18,270, or $1,522.50 a month.

Use the tax bill you will pay after the sale, not the seller's, and include management even if you plan to do it yourself. Leaving out vacancy, management and reserves is the most common way an NOI ends up one to two points of cap rate too high.