Calculate NOI before cap rate
Calculate net operating income and use it to interpret cap rate correctly.
A duplex is listed at $420,000 with advertised NOI of $31,200 and a 7.4 cap. Naomi wants to verify the operating income before deciding whether the price is reasonable. Income approach: gross income -> effective income -> operating expenses -> NOI -> cap rate The seller used pro forma rent, ignored vacancy, excluded management because they self-manage, and left out ordinary repairs. That makes the cap rate look precise while the income base is overstated. Gross scheduled rent $1,650 per unit x 2 units x 12 months = $39,600 gross scheduled rent. Start with rent that is supported by leases…
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