Financial
Real estate underwriting formulas: NOI, Cap Rate, and DSCR
Underwrite rental and commercial properties by calculating Net Operating Income (NOI), Capitalization Rate, Annual Debt Service, and lender DSCR covenants.
Connect property NOI to unlevered Cap Rate and levered DSCR
This simplified NOI estimate is GrossPotentialRent*(1-VacancyRate)-OperatingExpenses, before debt service and income tax.
Cap rate is modeled NOI divided by price. DSCR is modeled NOI divided by annual debt service; the 1.25 threshold used here is an illustrative covenant, not a universal lending requirement.
| Underwriting Line | Formula ($1M Property) | Result |
|---|---|---|
| Effective Gross Income | $120,000 * (1 - 5% Vacancy) | $114,000 / yr |
| Net Operating Income (NOI) | $114,000 - $34,000 OpEx | $80,000 / yr |
| Cap Rate | $80,000 / $1,000,000 | 8.00% |
| DSCR ($64k Debt Service) | $80,000 / $64,000 | 1.25x (Passes >= 1.25x) |
DSCR, Cap Rate, and NOI formulas
Compute the example NOI and ratio; use the unrounded value when checking any contractual threshold.
=LET(noi, B2 * (1 - C2) - D2, ROUND(noi / E2, 2))Unlevered Capitalization Rate (Cap Rate)
Divides annual Net Operating Income by acquisition price.
=ROUND((B2 * (1 - C2) - D2) / A2, 4)Inputs and interpretation
This is a simplified property calculation, not a lending decision. Use consistent annual amounts, a positive property price and positive debt service, and vacancy in [0,1]. Other income, reserves and lender adjustments may change NOI. A 1.25 threshold is illustrative and contract-dependent; compare the unrounded ratio to a covenant threshold.
Try the example
Use the original values or change them to test your understanding.