Does NOI Include Debt Service?

No. NOI is calculated before debt service, so the mortgage payment, both principal and interest, is not part of it. Lenders divide NOI by annual debt service to get the debt service coverage ratio. Subtract debt service from NOI and you have the property's cash flow before taxes.

Why the mortgage stays out of NOI

NOI describes the property. The loan describes the owner. Two people can buy identical fourplexes, one in cash and one with 80% financing, and the buildings produce exactly the same rent and cost exactly the same to run. Their NOI matches and their cash flow does not.

Keeping debt service below the line lets a lender size a loan from the property's income and lets an appraiser value it with a cap rate. Both would be impossible if NOI already had someone's mortgage in it.

From NOI to cash flow on a $500,000 rental

The default house produces $28,892 of NOI. Here it is with three different loans at 7.25% over 30 years. The NOI never moves. Debt service, coverage and cash flow all do.

Loan	Annual debt service	NOI	DSCR	Cash flow
None (cash)	$0	$28,892	n/a	$28,892
$250,000 (50% LTV)	$20,465	$28,892	1.41	$8,427
$300,000 (60% LTV)	$24,558	$28,892	1.18	$4,334
$375,000 (75% LTV)	$30,698	$28,892	0.94	-$1,806

Debt service coverage

Commercial lenders usually want the debt service coverage ratio at 1.20 to 1.25 or higher. On this house that means annual debt service of about $23,100 to $24,100, which at 7.25% is a loan of a little under $300,000.

The 75% loan in the table fails that test even though the house earns a healthy NOI. That is the most common reason a deal that looks fine on NOI does not work with financing. The NOI for a DSCR loan guide covers how residential DSCR lenders calculate it differently.

Mortgage insurance, escrow and other loan items

Property taxes and hazard insurance are often paid through the mortgage escrow, but they are still operating expenses and belong above NOI. Only the principal and interest part of the payment is debt service.

Private mortgage insurance, loan fees and points are financing costs. They stay out of NOI along with the loan itself.

Run the numbers on your property

The calculator below is loaded with the $500,000 example. Change any line to see how debt service and mortgage 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

Debt service and mortgage and NOI questions

Does NOI include the mortgage payment?

No. The principal and interest part of the mortgage payment is debt service, which comes after NOI. Taxes and insurance collected in escrow are different: they are operating expenses and do belong in NOI.

Is debt service an operating expense?

No. Debt service is a financing cost. Operating expenses are what it costs to run the property whether or not there is a loan. Debt service only exists because of how the owner chose to pay for it.

What is NOI minus debt service called?

Cash flow before taxes, sometimes called before-tax cash flow or levered cash flow. Divide it by the cash you invested and you get the cash on cash return.

Sources: Wikipedia: Debt service coverage ratio