Fixed Cost

A fixed cost is one that stays the same regardless of output or sales. In a rental, property taxes and insurance are the main fixed costs: they are billed whether the unit is full or empty. Fixed costs are what make NOI fall faster than rent when vacancy rises.

On the default house, taxes and insurance total $8,500 a year. If the unit sits empty for two months, rent drops by $8,000 but those bills do not shrink at all. The percentage-based costs of management, maintenance and reserves fall a little, and NOI takes most of the hit.

Buildings with a high share of fixed costs are more sensitive to vacancy. That includes high-tax states and properties with owner-paid utilities. When testing a deal, raise the vacancy figure in the calculator and watch how quickly NOI drops.