Same property. Different ownership-cost assumptions.
Entirely hypothetical. This is not a listing, a client transaction, a market forecast, an insurance quote or a financing offer. Every amount is an invented teaching assumption.
A $500,000 property is described as producing $40,000 in annual net operating income (NOI). That NOI already deducts $5,000 in annual property taxes and $4,000 in annual insurance. It includes no management charge. For this example, the buyer assumes $8,000 in property taxes, $6,000 in insurance and $3,000 for management. All other income and operating costs stay unchanged.
| Annual operating expense | Already in starting NOI | Buyer assumption | Change |
|---|---|---|---|
| Property taxes | $5,000 | $8,000 | +$3,000 |
| Insurance | $4,000 | $6,000 | +$2,000 |
| Management | $0 | $3,000 | +$3,000 |
Replace expenses. Don’t deduct them twice.
Illustrative buyer NOI = $40,000 − ($8,000 − $5,000) − ($6,000 − $4,000) − ($3,000 − $0) = $32,000 per year.
The starting cap rate is $40,000 ÷ $500,000 = 8.0%. Using the buyer’s assumptions, the illustrative cap rate is $32,000 ÷ $500,000 = 6.4%. Both are before financing. This calculation does not determine what the property is worth.
Then model the loan separately.
Assume a 25% down payment ($125,000), a $375,000 loan, a fixed 6% annual interest rate and monthly principal-and-interest payments amortized over 30 years. These are illustrative terms, not a lender quote.
DSCR = $32,000 ÷ $26,979.77. It compares the modeled NOI with annual loan payments; it is not a lender’s approval or underwriting result. Lenders may calculate NOI, reserves and required coverage differently.
Modeled NOI less annual loan payments is $5,020.23 per year. This is not spendable profit or a complete investor return: it excludes capital expenditures, reserves, closing costs, loan fees and income taxes. The example does not model rent growth, a sale, appreciation, refinancing or every ownership risk.
Show the calculation method
Loan principal = purchase price − down payment. Monthly payment = P × r ÷ [1 − (1 + r)−n], where P = $375,000, r = 0.06 ÷ 12 and n = 360. Annual debt service = unrounded monthly payment × 12. Results use full precision before display rounding; summing rounded monthly figures can differ by a few cents.
Background on NOI, debt-service coverage and capitalization: OCC Commercial Real Estate Lending handbook, pages 42 to 44. This educational model is not a lender underwriting decision.
What should replace these invented inputs?
Review operating statements and supporting records. Ask the appropriate county property appraiser about property-tax assumptions; obtain an insurance quote for the intended use and management terms from the relevant provider. Record each source and date. Do not reuse these example amounts as estimates for a real property.
Start with the investment definitions in the FAQs, then use the commercial due-diligence guide to connect assumptions with evidence. The Property Evidence Desk below shows what official records do (and do not) establish.
Educational illustration only. Assumptions are not guaranteed. This is not individualized investment, financial, legal, property-tax, income-tax, insurance or lending advice. Actual expenses, payments and results can differ materially; loss of capital is possible. Verify property-specific facts and seek qualified professional advice. This example does not recommend buying, selling or financing any property.