The NOI in the Memorandum Is Not the NOI You Will Earn
Every income property is priced on one number and every property loan is sized on the same number: net operating income. It is also the number most often flattered before a property goes on the market.
Not by fraud. By five small, defensible choices that all point the same way.
I built a calculator that puts the broker's NOI next to an underwritten one, line by line, then shows what the gap costs at a cap rate and how much a lender will actually lend on what is left. It covers the US and India, in dollars and rupees, with six presets.
Part two takes the same six properties over a full hold: rent growth, renovation, refinance, exit cap rate and IRR, with tax for Indian owners.
The 48-unit apartment that lost a fifth of its income
The preset is a 1990s garden-style community in a Sun Belt metro, asking $10.25 million.
| As marketed | Underwritten | |
|---|---|---|
| Occupancy | 97% today | 95%, the lender's floor |
| Other income | Trailing 12 months, one-off fees included | Recurring only |
| Property tax | The seller's bill, $120k | Reassessed on the price, $164k |
| Management fee | None, owner-managed | 3.5% of income |
| Reserves | None | $300 a unit |
| NOI | $591k | $470k |
| Cap rate on the asking price | 5.76% | 4.58% |
Every line on the left is true. The occupancy is real, the tax bill is real, the owner really does manage it. None of it will be true for the buyer.
The gap is $121k a year. At a 5.5% market cap rate, each dollar of NOI is worth about eighteen dollars of price, so that gap is $2.2 million of the asking price paid for income that will not arrive. The single largest item is the property tax reassessment, which in many US jurisdictions the sale itself triggers.
The five places a marketed NOI is usually flattered
- Vacancy. Today's occupancy, or a pro-forma one “on lease-up”. Lenders use a structural floor, commonly 5% for apartments, even when the building is full.
- Other income. One-off fees in the trailing twelve months, annualised.
- Property tax. The seller's assessment, not the buyer's.
- Management. Owner-managed properties show no fee. Fannie Mae underwrites at least 3% of effective gross income regardless.
- Reserves. Usually missing. Fannie Mae's floor is $250 a unit a year.
On the suburban office preset the same five items take 37% out of NOI, mostly vacancy (the memorandum underwrites 92% “on lease-up” against 82% today) and a reserve for re-letting costs that an office NOI without reserves simply leaves out.
How much the bank will lend
Lenders run three tests and lend the smallest answer.
- Loan-to-value: a share of the price, commonly 65–80% in 2026.
- Debt service cover: the yearly payment can be at most NOI divided by a minimum ratio, around 1.20–1.25x for apartments and 1.30–1.45x for office.
- Debt yield: NOI divided by the loan must clear a minimum, typically 8–12%. It ignores the rate and the amortisation, which is why lenders like it.
On the apartment preset the headline is 70% LTV. The cover test binds first and the loan comes out at $5.0 million, 49% of the price. The buyer needs $5.45 million of equity, not the $3.3 million a 70% loan would imply.
Negative leverage is the 2026 default
A 30-year amortising loan at 6.4% costs 7.5% of the balance each year in interest and principal. The apartment yields 4.58% on its price. When the loan costs more than the asset earns, every extra dollar borrowed lowers the cash return on equity.
| Preset | Cap rate on price | Loan constant | Cash-on-cash |
|---|---|---|---|
| US apartments | 4.58% | 7.51% | 1.7% |
| US neighbourhood retail | 5.77% | 8.18% | 2.8% |
| US suburban office | 5.71% | 8.67% | 2.9% |
| India Grade A office | 6.92% | 12.53% | 2.5% |
| India Grade A warehouse | 6.46% | 14.00% | 2.1% |
Part of each payment is principal, which builds equity rather than costing it, so this overstates the economic drag. But cash-on-cash is what the owner lives on, and with the 10-year Treasury having peaked at 4.67% this year, it is thin everywhere. CBRE's H1 2026 survey found US cap rates broadly flat at around 6.6% for all property, with the median respondent believing the 10-year would need to fall to 3.75% to restart deal flow.
India: what changes
- GST is not income. Commercial rent attracts 18% GST, charged to the tenant and remitted. It should never be in rent.
- Maintenance is usually billed directly. In Grade A offices the CAM charge goes to the tenant through the facility manager, so it belongs on neither side.
- Loans are sized on rent. Lease rental discounting lends against remaining lease rentals with an LTV ceiling around 65–70%. At 9.5% over 15 years the loan constant is 12.5%, against CBRE's Grade A office cap rates of 7.50–8.40%. The cover test binds at 43% of the price on the office preset.
- Single-tenant risk is the vacancy assumption. A fully let floor shows no vacancy in the memorandum. Underwritten, it carries the downtime, management and brokerage of re-letting when the lease rolls. Together they take 14% out of NOI on the office preset.
The flat is a different asset
The residential preset is a 3BHK bought at ₹1.8 crore and let at ₹48,000 a month: the “3.2% rental yield” in the listing. After society maintenance, property tax, a month between tenancies and brokerage on each new lease, the underwritten yield is 2.08%.
Borrow 75% at 9% over 20 years and the yearly instalment is ₹14.6 lakh against ₹3.7 lakh of NOI. Even fully let, the rent does not cover the loan. Cash-on-cash is minus 19%.
That does not make it a bad purchase. It makes it a bet on the price, funded from salary, not an income investment. The calculator says so plainly, and switches off the market cap rate, because flats are priced on comparable sales, not on income.
What it leaves out
One year only: no rent growth, no lease-by-lease rent roll, no exit value or IRR, no income tax or depreciation, and no detailed tenant-improvement and leasing-commission schedule beyond the reserve line. The presets are illustrative composites, not real properties, and none of this is investment advice.