Does NOI Include Property Taxes?

Yes. Property taxes are an operating expense and are subtracted before NOI. On most single-family rentals they are the largest single expense. Income taxes are different: the owner's tax on rental profit is not an operating expense and stays out of NOI.

Why property taxes belong in NOI

Any owner of the building pays the property tax, whatever their loan or tax bracket. It comes with owning and running the property, the same as insurance or repairs. That is the test for an operating expense.

It is also tied to the property's value, so it matters twice in a valuation. A higher tax bill lowers NOI, and lower NOI means a lower value at the same cap rate.

Property taxes on a $500,000 rental

The default house assumes taxes at 1.2% of price, or $6,000 a year. That is 13.2% of the $45,600 collected rent and more than a third of the $16,708 total expense load.

Tax rates across the US range from well under 1% of value to over 2%. Moving the bill alone shifts NOI and value by these amounts, with everything else held equal:

Annual property tax	Rate on $500k	NOI	Value at 6.5%
$3,000	0.6%	$31,892	$490,646
$6,000	1.2%	$28,892	$444,492
$11,000	2.2%	$23,892	$367,569

Use the tax bill after you buy

Many states and counties reassess on sale. A seller who bought 15 years ago may pay a fraction of what the next owner will. Underwrite with the tax bill you will pay, not the one on the seller's statement, or your NOI will be overstated from day one.

In California, Proposition 13 resets the assessed value to the purchase price at sale, and the base rate is 1% plus local charges. Other states phase in reassessments or cap annual increases. Check with the county assessor before you rely on a number.

Property taxes paid through escrow

Lenders often collect taxes monthly with the mortgage payment. That does not make them debt service. Split the escrow part out and count it as an operating expense. Only principal and interest come off after NOI, as covered under debt service.

Run the numbers on your property

The calculator below is loaded with the $500,000 example. Change any line to see how property taxes 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

Property taxes and NOI questions

Are property taxes an operating expense?

Yes, for rental and commercial property. They are a recurring cost of owning the building that any owner would pay. The operating expense checklist lists them first because they are usually the largest line.

Does NOI include income taxes?

No. Income tax depends on the owner's whole tax picture, including mortgage interest and depreciation, so it is left out. NOI is a before-tax figure. See is NOI before or after taxes.

In a triple net lease, are property taxes in NOI?

If the tenant pays the taxes directly under a triple net lease, the landlord has no tax expense, and NOI is close to the base rent. If the landlord pays the bill and bills the tenant back, the reimbursement is income and the tax is an expense, and they largely cancel.

Sources: Wikipedia: Property tax in the United States