NOI

Net operating income is the most important number on a multifamily property's financial statement. It's what's left after you collect rent, account for vacancy, and pay the operating expenses, but before you pay the mortgage, set aside for capex, or pay tax.

The math

NOI starts with effective gross income (rents collected after vacancy and bad debt) and subtracts operating expenses:

• Property taxes
• Insurance
• Property management (whether paid to a third party or imputed if owner-managed)
• Repairs and maintenance
• Utilities (the portion not billed back to tenants)
• Marketing and leasing
• Administrative

What's NOT in operating expenses, and therefore stays in NOI:

• Mortgage payments (debt service)
• Depreciation (a tax concept, not an operating cost)
• Capital expenditures (these are above the NOI line in some models, below in others; conventions vary)
• Income taxes

Why NOI is the underwriting battleground

Buyers and sellers almost always disagree on the right NOI for a building. The reasons:

• Owner-managed payroll. A seller who self-manages has $0 of management cost on the P&L. A new owner will pay 4-6% of rents for third-party management. We account for that.
• Insurance reset. Insurance has risen sharply nationwide. The seller's renewing policy from three years ago is often well below what the next buyer's policy will cost.
• Property tax reset. In Texas especially, property tax assessment resets on sale. A long-held building's tax line jumps significantly for the new owner.
• Below-market rents. A seller may argue NOI should reflect "market rents" the next owner can charge. A buyer is paying for what's actually being collected today, with the upside priced separately.

How Kallpa underwrites NOI

We recast the seller's NOI to what a new owner will actually experience: third-party management at market rates, current insurance quotes, post-sale property tax assessment, realistic vacancy and bad debt. The recast NOI usually differs from the seller's headline NOI, sometimes by 10 to 20 percent.

We share the recast and explain every line we changed. If you've got a different read on a line, we work through it together.