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Net Operating Income (NOI) is the foundation of every multifamily underwriting analysis. It's the income a property generates after operating expenses but before debt service and capital expenditures. Every other metric — cap rate, DSCR, cash-on-cash — starts with NOI.
Each step matters. Gross Potential Rent assumes every unit is occupied at market rent. Vacancy loss adjusts for reality. Other income adds non-rent revenue. Operating expenses cover everything needed to run the property. What's left is NOI — the income available to service debt and provide returns to investors.
Included in operating expenses: Property taxes, insurance, property management fees (typically 5-8% of EGI), repairs and maintenance, utilities paid by owner, landscaping, pest control, marketing/advertising, accounting and legal, administrative costs, and common area maintenance.
Not included in operating expenses: Mortgage payments (principal and interest), capital expenditures (roof replacement, HVAC systems, major renovations), depreciation, income taxes, and investor distributions. These items come after NOI in the financial waterfall.
The expense ratio (operating expenses / EGI) tells you how efficiently the property is being operated. For multifamily properties:
35-45% — Typical for well-managed Class B/C properties. This is the range most underwriters expect.
25-35% — Common for newer Class A properties or properties where tenants pay most utilities. Below 25% warrants investigation — expenses may be understated or deferred maintenance may be accumulating.
45-55%+ — Higher expense ratios are common for older properties, properties in high-tax jurisdictions, or properties with significant deferred maintenance. Look at whether management fees or specific line items are driving the ratio up.
Brokers present deals with proforma NOI — the income the property could generate under ideal conditions. Trailing NOI (from the T12 or actual financials) shows what the property actually generated over the past 12 months. The gap between the two is where most underwriting disagreements happen.
Always underwrite to trailing NOI first. If the broker's proforma assumes 3% vacancy when the T12 shows 8%, or projects $50/unit rent increases that haven't materialized, those are assumptions you need to challenge — not accept at face value.
Upload any offering memo or T12. Dealyze reads the document, extracts GPR, vacancy, expenses (with line items), and calculates NOI automatically. Includes sensitivity analysis showing NOI across multiple vacancy and rent scenarios.
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