Is Amortization an Operating Expense in Real Estate? NOI Rules

Is Amortization an Operating Expense?

Not on a rental property. Loan amortization, the principal part of a mortgage payment, is repayment of debt, not an expense. Loan fees and points are amortized over the loan for tax purposes, on Schedule E. Neither one belongs in a property's net operating income.

Loan amortization is not an expense

A mortgage amortizes when each payment repays part of the balance. On the site's default $375,000 loan at 7.25% over 30 years, the $30,698 of first-year payments includes about $3,629 of principal. That principal is not an expense. It reduces a liability, and the owner builds that much equity.

For underwriting, principal and interest are both part of debt service, which comes off after NOI. So loan amortization reduces cash flow but never NOI. The NOI vs cash flow guide shows the full step from one to the other.

Kind of amortization	Operating expense?	In NOI?
Loan principal repayment	No, not an expense	No
Loan costs spread over the loan term	No, a financing cost	No

Amortization on a rental property

Loan fees and points are amortized over the life of the loan for tax purposes. Some costs of buying a property with leases in place can be amortized over the remaining lease terms. Both are tax entries on Schedule E, next to depreciation.

The operating statement stays clean: rent in, vacancy and operating expenses out, NOI at the bottom. On the default house that is $28,892, whatever the amortization schedules say.

Run the numbers on your property

The calculator below is loaded with the $500,000 example. Change any line to see how amortization moves NOI and value, or read the full operating expense checklist for every line that belongs above NOI.

Itemized income and expense lines

Income

Monthly rent (all units)$Scheduled rent at full occupancyUnitsFor per-unit figures. 1 for a house or condo.Other monthly income$Parking, laundry, pet rent, storage, utility billbackVacancy and credit loss%$2,400 a year. 5 to 8% is typical.

Operating expenses

Annual property taxes$Use the bill after reassessment, not the seller'sAnnual insurance$Landlord policy, plus flood or wind where neededHOA dues (monthly)$Owner-paid utilities (monthly)$Water, sewer, trash, gas, common-area electricOther monthly expenses$Lawn, snow, pest, licenses, legal, accounting

Price and market (optional)

Purchase price or value$Leave at 0 if you only need NOI. Turns on the cap rate.Market cap rate%What comparable properties sell at. Values the NOI.

Net operating income (annual)

$28,892

$2,408 a month

Typical expenses · 37% ratio

Typical. 30 to 45% of collected income covers expenses, the range most single-family and small multifamily rentals land in with every cost counted.

Income statement

Gross scheduled income: $48,000
Vacancy and credit loss: -$2,400
Effective gross income: $45,600
Property taxes: -$6,000
Insurance: -$2,500
Maintenance: -$2,280
Capital reserves: -$2,280
Management: -$3,648
Total operating expenses: -$16,708
Net operating income: $28,892
Expense ratiooperating expenses / effective gross income: 36.6%
NOI marginNOI / effective gross income: 63.4%

What this NOI is worth

Value at a 6.50% cap rate: $444,492
Cap rate at this price$28,892 / $500,000: 5.78%
Priced above that value by: $55,508
Gross rent multiplierprice / gross scheduled income: 10.4

What moves it

Each $100/mo of rent addsof annual NOI after vacancy and percentage expenses: $935
Each point of vacancy costsof annual NOI: $394
Each $1,000 of NOI is worthat a 6.50% cap rate: $15,385

Amortization and NOI questions

Is amortization a non-cash expense?

Amortized loan costs are non-cash, like depreciation. The cash went out at closing. Loan amortization is the opposite: it is real cash leaving every month, but it is repayment of debt rather than an expense.

Does NOI include mortgage principal?

No. Principal is part of the mortgage payment, which comes after NOI. See does NOI include debt service for the full breakdown.