Are mortgage payments an operating expense?

No. Principal and interest are debt service, which sits below NOI. Operating expenses are the costs of running the property regardless of how it is financed. Keeping the mortgage out is what lets a lender, an appraiser and a cash buyer compare the same NOI.

Is property management an operating expense if I manage it myself?

Yes. Include 8 to 10% of collected income even when you plan to self-manage. An appraiser will deduct it, a lender will deduct it, and the buyer you eventually sell to will deduct it. Leaving it out overstates NOI and the value it supports.

Are capital expenditures operating expenses?

A reserve for future capital items is usually treated as an operating expense on small residential property, at 5 to 10% of collected income. The actual cost of a new roof in a given year is not. Improvements that add value or extend the property's life are capitalized, not expensed.

Do property taxes count as an operating expense?

Yes, and they are usually the largest single line. Use the bill you will pay after purchase. In states that reassess on sale, that can be far above what the seller pays. Income tax on your rental profit is different and is not an operating expense.

Operating Expenses in NOI | What Is Included and Excluded

Operating expenses are every recurring cost of keeping a rental property occupied, insured, repaired and managed. They come off effective gross income to produce net operating income, so each dollar you miss inflates NOI by a dollar and inflates value by a dollar divided by the cap rate. At a 6.5% cap rate, a forgotten $1,000 expense makes a property look about $15,400 more valuable than it is.

Here is what belongs on the list, what does not, and the lines where people most often go wrong. The NOI formula guide shows where these fit in the full calculation.

The full list

Property taxes. The largest line on most single-family rentals. Use the assessment and millage rate that will apply after you buy, not the seller’s current bill. Many counties reassess on sale, and the difference can be 30% or more.

Insurance. A landlord or dwelling fire policy, plus flood, wind, hail or earthquake coverage where the location requires it. Get a quote, not an estimate, because rates have moved sharply in coastal and wildfire markets.

HOA and condo dues. Monthly dues times twelve, plus any known special assessment.

Maintenance and repairs. Routine fixes: plumbing calls, a broken garbage disposal, paint between tenants, a service call on the furnace. 5 to 10% of collected income for most properties, at the high end for buildings over 40 years old.

Capital reserves. Money set aside for the roof, HVAC, water heater, appliances, flooring and exterior paint. 5 to 10% of collected income. None of these items breaks every year, but one of them breaks in most years, and the reserve smooths that.

Property management. 8 to 10% of collected rent for long-term rentals, plus a leasing fee, often half to a full month’s rent per new tenant. Include it whether or not you plan to pay it.

Owner-paid utilities. Water, sewer, trash, gas and common-area electric where the lease puts them on the landlord. On a single-family house these are often zero. On a multifamily building with one water meter they can be the third-largest line.

Landscaping, snow removal and pest control. Whatever the lease does not shift to the tenant.

Advertising and leasing. Listing fees, screening costs, the time a unit sits between tenants is in vacancy, but the cost of filling it is here.

Legal, accounting and licensing. Eviction filings, lease preparation, the accountant’s fee for the rental schedule, rental registration and inspection fees where the city requires them.

Replacement of small items. Smoke detectors, locks, blinds, a microwave. Too small to reserve for, too regular to ignore.

What stays out

Debt service. Principal and interest on the mortgage. NOI is before financing by definition. The NOI vs cash flow guide picks up where NOI stops.

Depreciation. A tax deduction, not a cash expense. It reduces the taxable income you report on Schedule E, and it has no place on the property’s operating statement.

Income taxes. Yours, on the rental profit. The property does not pay them.

Capital improvements. A new addition, a kitchen remodel that raises rent, converting a basement to a unit. These add value or extend the life of the building and are treated as investments. A worn water heater replaced with the same water heater is a reserve item, not an improvement.

Closing costs and acquisition fees. One-time costs of buying, not of operating.

Your own labor. Not an expense in the cash sense, but see management above. If you do work a buyer would pay for, the buyer will price it in.

A worked example

A $300,000 house at $2,500 rent with 5% vacancy has effective gross income of $28,500. Taxes are $3,600, insurance $1,500, and maintenance, reserves and management at 18% of collected income come to $5,130. Total operating expenses are $10,230, or 35.9% of collected income, and NOI is $18,270.

Expense	Annual	Share of collected income
Property taxes	$3,600	12.6%
Insurance	$1,500	5.3%
Maintenance at 5%	$1,425	5.0%
Capital reserves at 5%	$1,425	5.0%
Management at 8%	$2,280	8.0%
Total	$10,230	35.9%

Taxes are a third of the expense load on their own. Drop the tax rate from 1.2% of value to 0.6% and NOI rises to $20,070. Move it to 2.2%, common in parts of Texas, Illinois and New Jersey, and NOI falls to $15,270. Same house, same rent, a $4,800 swing in NOI and about a $74,000 swing in value at a 6.5% cap rate. The calculator lets you change each line and watch the value move.

The lines people leave out

Four omissions account for most inflated NOI figures.

Management, because the owner self-manages. Adds 8 to 10% of collected income to NOI.

Reserves, because nothing broke last year. Adds 5 to 10%.

Vacancy, because the property is full today. Adds 5 to 8%, though it sits above the expense line.

Taxes at the seller’s assessment. Adds whatever the reassessment will cost, often 0.3 to 0.6% of price per year.

Together these can add 20 points of expense ratio, which on the $300,000 house is about $5,700 of NOI and roughly $88,000 of apparent value at 6.5%. This is why a listing’s pro forma NOI and a buyer’s underwritten NOI so rarely agree, and why an experienced buyer rebuilds the statement from scratch. The expense ratio guide gives the ranges that tell you when a statement is missing something.

Percentage lines versus dollar lines

Taxes, insurance, HOA and utilities are dollar figures. Get the real numbers. Maintenance, reserves and management are usually estimated as a percentage of collected income, which is fine for underwriting but has one trap: the percentages should apply to effective gross income, after vacancy, not to scheduled rent. A manager is paid on rent collected. Applying 8% to $30,000 instead of $28,500 overstates the fee by $120 and, if you do it on every percentage line, understates NOI by a few hundred dollars.

For a property you already own, replace the percentages with trailing actuals once you have a full year. Keep the reserve as a percentage regardless, because the actual capital spend in any one year tells you nothing about the average.

Expenses and your return

Every operating expense reduces NOI and, through the cap rate, the value. Below NOI, the mortgage reduces cash flow, and cash flow divided by the cash you put in is the cash on cash return. A Cash on Cash Return Calculator will carry the NOI from here through the loan to that figure.

The reason to be strict about the expense list is not caution for its own sake. It is that every expense you find before closing is one you negotiate on the price. Every one you find afterward comes out of your return. On the fourplex in the formula guide, the seller’s pro forma and a rebuilt statement differed by $17,000 of NOI. At a 7% cap rate, that is the difference between a fair price and overpaying by about $243,000.

What Counts as an Operating Expense in NOI (and What Does Not)