Commercial Real Estate Investment Calculator

The net operating income formula, line by line

NOI is what every other number on this page is built from. The formula is gross income less vacancy less operating expenses, and the arguments are almost always about what belongs in that middle term.

Gross potential income is what the property collects at full occupancy. Effective gross income subtracts a vacancy and credit loss allowance — typically 3% to 10%, and a lender will impose its own if yours looks optimistic. Operating expenses are what it costs to run the building: property taxes, insurance, utilities, repairs and payroll, and administration. Property management is usually quoted as a percentage of collected income rather than a dollar figure, which is why this calculator breaks it out separately.

Two things do not belong in NOI: debt service and capital expenditure. NOI is deliberately a pre-financing number, because it describes the property rather than the deal. That is what makes it comparable across buyers with different loans. Replacement reserves are the borderline case. Lenders underwrite them — $250 to $400 per unit per year is a common multifamily convention — while brokers often omit them, which is one reason a marketing NOI and an underwritten NOI rarely agree.

The default scenario here shows the gap plainly. Gross income of $420,000 less $175,000 of operating expenses gives an NOI of $245,000, a 7.00% going-in cap rate. Turn on the institutional view and a 5% vacancy allowance plus $10,500 of reserves drops NOI to $213,500, a 6.10% cap rate. Same building, same rent roll, 90 basis points of difference — entirely in the assumptions.

If two parties disagree about a cap rate or a DSCR, they are almost always disagreeing about NOI. Settle the income statement first and the ratios follow.

How lenders size commercial loans: coverage vs. value

Every commercial term sheet runs two independent tests and advances whichever gives the smaller number. They protect against different failures, which is why neither one alone is sufficient and why quoting only the first is how borrowers end up short at closing.

The value test protects the lender if the borrower stops paying and the asset has to be sold. It caps the advance at a share of value — the lesser of purchase price and appraisal — leaving a cushion between the debt and a distressed sale price. The coverage test protects against the borrower stopping in the first place. It asks whether the income services the payment with room to spare: take NOI, divide by the minimum coverage ratio, and that is the largest annual debt service the property supports. The loan is whatever principal produces that payment at the quoted rate and amortization.

Which test binds depends almost entirely on the relationship between cap rates and borrowing costs. When debt is cheap relative to the yield on the asset, the income comfortably services a full-leverage loan and value binds. As rates rise toward or past cap rates, debt service climbs while NOI does not, and coverage starts binding on deals that would have cleared on value alone a year earlier. That single shift explains most of the term sheets that stopped funding at their quoted leverage through the 2022–2023 repricing.

The reporting trap

When coverage binds, the loan is cut until coverage reaches the minimum. So the funded loan always achieves exactly that minimum — and a calculator reporting only the achieved ratio shows a comfortable pass on precisely the deals that failed. This tool reports coverage at the leverage you asked for, which is the number that failed, alongside the shortfall it costs you in equity.

Cash-on-cash return, and when leverage works against you

The cap rate tells you what the property earns. Cash-on-cash tells you what you earn. The formula is annual cash flow after debt service divided by the total cash you put in — down payment plus closing costs, not just the down payment.

Most people assume borrowing raises the return. It does, but only under one condition: the loan constant has to be below the cap rate. The loan constant is annual debt service as a percentage of the loan, and it depends only on rate and amortization. At 6.75% over 30 years it is 7.78%.

Compare that with the 7.00% going-in cap rate in the default scenario and the problem is visible. The debt costs 7.78% a year while the property earns 7.00%, so every borrowed dollar earns less than it costs. Unleveraged, the deal returns 7.00%. Leveraged at the 69% the coverage test actually funds, cash-on-cash falls to 4.92%. That is negative leverage, and it is common whenever borrowing costs sit above cap rates — not an unusual case.

Negative leverage is not automatically a reason to walk. Investors accept it for principal paydown, for a value-add plan that raises NOI, or because they expect to refinance. But it should be a decision, not a surprise. Turn on the Year 1 equity analysis to see it: cash-on-cash understates your return because it ignores the principal your tenants are paying down, which is why total annual yield comes in higher.

Two cautions on the number itself. Cash-on-cash is a first-year figure, so it says nothing about rent growth, capital expenditure or your eventual sale price. And it depends entirely on the loan you actually get — the coverage-sized figure above, not the leverage on the term sheet. A cash-on-cash return calculated on debt the lender will not fund is a number about a deal that does not exist.

Underwriting benchmarks

Ranges rather than single figures, because every one of these varies by asset class, market, vintage and lender appetite. Treat them as the band inside which a deal looks ordinary, and anything outside as something to be able to explain.

Two cases worth running

Working out what NOI you need

Coverage-sized proceeds move in proportion to NOI. At the default terms — 6.75% over 30 years, a 1.30x minimum — each dollar of NOI supports about $9.88 of loan, so an extra $25,000 of net income is worth about $247,081 of proceeds. That converts a leasing target into a financing outcome, and it changes how hard you push on a renewal.

Sanity-checking an aggressive valuation

Debt yield is the one figure a generous appraisal cannot flatter, because it references the income and the advance and nothing else. If LTV and coverage both clear but debt yield sits below nine percent, expect the lender to cap proceeds there regardless — and expect that conversation to happen late.