NOI and cap rate: the valuation base
NOI = gross rent × (1 − vacancy) + other income − operating expenses − capital reserve, before debt service and taxes. The cap rate — NOI ÷ price — is the market's common language: a 6% cap means 6 units of operating income per 100 of price. Higher caps usually price higher risk (weaker tenants, colder locations). Direct capitalization is that one division: V = NOI ÷ cap. A DCF discounts growing NOI and adds an exit value at an exit cap.
Leverage: debt service and equity returns
Leverage amplifies equity returns in both directions: when the cap rate exceeds the loan rate (positive carry), more debt raises cash-on-cash; below it, leverage eats returns. Lender metrics draw the safety boundary: DSCR under ~1.20 is a warning, and a low debt yield means even a quick sale would not cover the loan. Equity multiple (total distributions ÷ equity) is intuitive but blind to timing; IRR fixes that — with the caveat that it implicitly reinvests interim cash flows at the IRR itself.
Worked example: a 1m property with 65% debt
- Price 1,000,000; gross rent 120,000, vacancy 5%, other 10,000, opex 40,000, reserve 5,000 → NOI = 89,000.
- Cap = 8.9%. Loan 650,000 at 7%, 30-year amortization: ADS ≈ 51,900; DSCR ≈ 1.71.
- Equity = 1,000,000 − 650,000 + 20,000 acquisition = 370,000; CoC ≈ 10.0%.
- Sale in year 5 at 1,150,000 with 2% costs, loan balance ≈ 612,000 and 20% tax on gain → net proceeds ≈ 489,000.
- Equity IRR ≈ 14–15% (the platform engine computes it on an exact ACT/365F grid).
نتیجه: A deal with an 8.9% cap and sensible leverage delivers both double-digit cash-on-cash and a safe DSCR — but every number hangs on the 'true' NOI: mis-estimated vacancy or expenses moves everything.