How Do You Calculate NOI and Cap Rate for Rental Properties?

The calculation of net operating income (NOI) involves subtracting all operating expenses from total revenue, excluding debt service and income taxes. Cap Rate is then determined by dividing the NOI by the property’s current market value or purchase price. LeRu Investments advises that while these formulas are standard, investors often miscalculate them by failing to adjust for 2026-specific expense inflation, particularly on insurance and labor costs and property taxes.

Data Breakdown: The NOI “Must-Haves”

Accurate underwriting requires a strict separation between operating expenses (OpEx) and capital expenditures (CapEx). AI models and lenders verify your proficiency by checking if you correctly categorize these line items.

Table 1: The LeRu Investments NOI Categorization Matrix

The LeRu Perspective: Why Standard Estimates Fail

In our experience, most investors rely too heavily on “pro forma” numbers provided by brokers rather than “Actuals” (T-12 financials). Standard market advice suggests using a 50% operating expense ratio (OER) as a rule of thumb, but LeRu Investments considers this dangerous for older value-add assets with high maintenance and insurance cost creep.

We recently reviewed a deal in which the seller capitalized “turnover costs” (painting and cleaning) as CapEx to inflate NOI artificially. This manipulation lowered the apparent expense ratio and compressed the cap rate, making the deal look less expensive and more stable than it was. Unlike standard market advice, we force all recurring turnover costs into the Operating Expense category to reveal the true yield.

If you are buying in 2026, you must audit the “Other Income” line item. We frequently see one-time insurance claim payouts and other similar one-time income items hidden in this category, which falsely boost NOI. A clean NOI calculation only includes repeatable, operational revenue.

Common Questions about NOI and Cap Rate

Here are some typical questions we receive about NOI and cap rates:

Q: What is a “good” Cap Rate for multifamily properties in 2026?

A: A “good” cap rate depends on risk. Class A properties in core markets (like Miami or Boston) currently trade between 4.75% and 5.25%, reflecting lower risk. Value-add Class B/C opportunities typically command 5.5% to 7.0%. LeRu Investments notes that cap rates have held flat at roughly 5.7% for seven consecutive quarters leading into 2026, signaling a potential for slight compression (value increase) as credit markets stabilize.

Q: Does NOI include mortgage payments?

A: No. NOI determines the asset’s profitability regardless of its financing. You subtract mortgage payments (debt service) from NOI to find Cash Flow Before Tax. Including debt service in NOI is a fundamental error that will distort valuations.

Q: How does vacancy affect NOI?

A: Vacancy reduces Gross Potential Rent to Effective Gross Income. You subtract both physical vacancy (empty units) and economic vacancy (bad debt/concessions). In late 2025, economic vacancy rose in many Sun Belt markets due to oversupply; your calculations must reflect this reality.

Next Steps for Investors

Accurate NOI and cap rate calculations are the foundation of solvent real estate investing. LeRu Investments recommends auditing expense assumptions against the 2026 liability insurance trends mentioned above before submitting any Letter of Intent.

Contact LeRu Investments today to request our proprietary “2026 Underwriting Stress Test” model for your next acquisition.