Mortgage

A mortgage is borrowing backed by a pledge of real property, which the lender can claim through foreclosure if payments stop. Mortgage payments are not operating expenses, so they stay out of net operating income. NOI measures the property; the mortgage decides how much of it the owner keeps.

Borrow $375,000 against the default house at 7.25% for 30 years and the payments add up to about $30,698 annually. NOI is $28,892, so the property falls about $1,806 a year short of covering the loan. The NOI and the value are the same whether the buyer borrows or pays cash.

Lenders size income property loans from NOI. They divide it by a target debt service coverage ratio to find the largest payment the property can carry, then work back to a loan amount. That is why lenders review NOI closely before approving a loan.