Stewart Beal talks about his “super-size house hacking,” BRRR, property management, and lessons for becoming a successful investor. Enjoy the show!

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468-Unit House Hack w/ Stewart Beal - OfferMarket Podcast

OfferMarket Podcast, Episode 1: 468 Unit SUPER SIZE House Hack with Stewart Beal

<br>

**Last Update**: December 3, 2024

<br>


Understanding how to calculate [net operating income (](https://www.offermarket.us/blog/noi-net-operating-income)NOI) is crucial for anyone navigating the world of DSCR (Debt Service Coverage Ratio) loans. These loans are commonly used in real estate investing, where lenders assess a property's ability to generate enough income to cover its debt obligations. At the heart of this evaluation lies the calculation of NOI, a key metric that determines financial viability.

<br>

**Important clarification:** For loan qualification purposes, DSCR is calculated using the formula:

**DSCR** \= Gross Rental Income / PITIA,

where **PITIA** stands for Principal, Interest, Taxes, Insurance, and HOA dues.

While Net Operating Income (NOI) is a useful indicator of profitability, DSCR lenders like OfferMarket use gross rental income, not NOI, to determine whether the property’s income can cover the mortgage obligations.

<br>

NOI provides a clear picture of a property's profitability by subtracting operating expenses from total revenue. For investors and lenders alike, this calculation isn't just a number—it's a deciding factor in loan approvals and investment decisions. Knowing how to accurately determine NOI ensures smarter financial moves and better outcomes in the competitive real estate market.

<br>

## Understanding DSCR Loans

<br>

[DSCR loans](https://www.offermarket.us/blog/what-is-a-dscr-loan-requirements) assess a borrower's ability to repay debt based on a property's income relative to its debt obligations. These loans are commonly used for income-producing real estate investments.

<br>

### What Is A DSCR Loan?

<br>

A DSCR (Debt Service Coverage Ratio) loan is a type of financing that measures a property's cash flow against its debt payments. Lenders calculate DSCR by dividing Gross Rental Income by PITIA (Principal, Interest, Taxes, Insurance, and HOA fees) — not NOI. This formula directly assesses whether the rental income can cover all required monthly obligations. For instance, a DSCR of 1.25 indicates that the property generates 25% more income than the required debt payments. Borrowers often use DSCR loans to fund rental properties or commercial real estate, where consistent income generation is critical.
DSCR thresholds vary by lender but typically range between 1.0 and 1.5. The higher the DSCR, the more likely a property can sustain its debt payments, reducing lending risk.

<br>

 <div style="position: relative;width: 100%;overflow: hidden; padding-top: 56.25%;"> <iframe style="position: absolute; top:0; left:0; bottom:0; right:0; width: 100%; height: 100%;border: none;" src="https://www.youtube.com/embed/QBJw5lm-Ajs" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen> </iframe> </div> 

<br>

### Importance Of Net Operating Income In DSCR Loans

<br>

Net Operating Income (NOI) plays a pivotal role in [DSCR calculations](https://www.offermarket.us/blog/how-to-calculate-dscr-in-real-estate) as it represents the property's profitability before debt obligations. By subtracting operating expenses like maintenance, utilities, and property management fees from total revenue, lenders determine the income available for debt repayment. Accurate NOI calculations ensure reliable DSCR outcomes, directly affecting loan approval and interest rates.

<br>

For instance, if a property generates $150,000 in annual revenue and incurs $50,000 in operating expenses, the NOI is $100,000. If the total annual debt service is $80,000, the DSCR would be 1.25 ($100,000 ÷ $80,000). A higher NOI often translates to a higher DSCR, making the borrower more likely to secure favorable loan terms.

<br>

While NOI helps assess overall investment performance, OfferMarket calculates DSCR using Gross Rental Income rather than NOI. Therefore, while understanding NOI is important for investors, it’s the gross rent (as supported by appraisals and adjusted for vacancy) that determines loan eligibility.

<br>

## What Is Net Operating Income (NOI)?

<br>

Net Operating Income (NOI) represents a property's profitability by measuring its income after operating expenses but before financing costs and taxes. It's a critical metric for evaluating [real estate investments](https://www.offermarket.us/blog/how-to-invest-in-real-estate) and assessing eligibility for DSCR loans.

<br>

### Defining Net Operating Income

<br>

Net Operating Income is the difference between a property's total revenue and operating expenses. It excludes financing charges, such as mortgage payments, and non-operational costs like income taxes. NOI reflects the cash flow generated solely from operations, helping investors and lenders gauge the property's financial health.

<br>

### Components Of NOI: Income And Expenses

<br>

NOI is calculated using two primary components:

<br>

1. **Income**: Includes all revenue streams generated by the property. Common sources are rental income, parking fees, laundry income, and any other miscellaneous operating income.
2. **Expenses**: Comprises the costs necessary to maintain and manage the property. Typical expenses include property management fees, repairs, utilities, property taxes, insurance, and advertising costs. Non-cash deductions like depreciation are excluded.

<br>

These components ensure an accurate picture of operational profitability, separating it from other financial elements like debt and taxes.

<br>

![DSCR Formula Interest Only](https://cms.offermarket.us/uploads/DSCR_Formula_Interest_Only_9bcd6c02ff.jpg)

<br>

## How to Calculate Net Operating Income (NOI) for Real Estate Analysis

<br>

Accurate calculation of Net Operating Income (NOI) is essential for evaluating a property's eligibility and performance under DSCR loans. This process involves determining the property's total income and deducting its operational expenses.

<br>

⚠️ **Note:** For DSCR loan qualification, NOI is not used in the lender’s DSCR formula. Instead, DSCR is based on Gross Rental Income divided by PITIA. NOI is still a valuable metric for evaluating the investment’s broader financial performance, including comparisons via Cap Rate or internal cash flow analysis.

<br>

### Step-By-Step Guide To Calculate NOI

<br>

1. **Determine Total Revenue**
<br> Calculate all sources of income generated by the property. This includes rental payments, parking fees, late payment charges, and any additional income associated with property operations.
2. **Identify Operating Expenses**
<br> List all necessary costs for property management and maintenance. Operating expenses include utilities, property management fees, repairs, insurance premiums, and marketing costs. Do not include debt service, depreciation, or taxes.
3. **Subtract Expenses From Revenue**
<br> Deduct the total operating expenses from the total revenue. For example, if a property generates $180,000 annually and incurs $60,000 in expenses, the NOI equals $120,000.
1. **Including Non-Operating Costs**
<br> Avoid incorporating debt service, capital expenditures, and taxes, as they don't reflect operational profitability. These costs affect other financial metrics but not NOI.
2. **Overlooking Irregular Income or Expenses**
<br> Exclude one-time income, such as sale proceeds, or irregular expenses unless they're recurring. This ensures the calculation provides consistent, comparable results.
3. **Failing to Include All Revenue Streams**
<br> Omitting smaller revenue sources, like application fees or parking charges, can lead to understated NOI. Every income stream from property operations should be included.
4. **Misclassifying Maintenance Costs**
<br> Ensure long-term capital improvements are not mixed with routine repair expenses, as only the latter belongs in the NOI calculation. Misclassification distorts accuracy.

<br>

Adhering to these steps and avoiding calculation errors enhances the reliability of NOI figures, directly influencing the success of DSCR loan evaluations.

<br>

## How Lenders Calculate Gross Rental Income and PITIA

<br>

Gross Rental Income (Numerator):  
 Lenders determine this from the appraisal rent schedule or, for short-term rentals, from projected income and historical data. A vacancy rate adjustment of 5–10% is typically applied to account for rental downtime.

<br>

**PITIA (Denominator):**  

 PITIA includes:

* **Principal** (monthly loan repayment)

* **Interest** (based on the note rate)

* **Taxes** (annual property tax, divided monthly)

* **Insurance** (annual hazard or landlord policy, divided monthly)

* **HOA dues** (if applicable)

<br>

These are the components that rental income must cover to satisfy lender DSCR thresholds.

<br>

## DSCR vs. NOI: What’s the Difference?

<br>

* **DSCR** \= Gross Rental Income / PITIA → used by lenders to qualify borrowers

* **NOI** \= Gross Operating Income – Operating Expenses → used by investors to assess asset profitability

<br>

Even though both metrics are critical, they serve different purposes. NOI is not directly used in OfferMarket's DSCR formula but provides broader insight into cash flow performance.

<br>

## Why NOI Matters For DSCR Loan Approval

<br>

NOI is central to determining the success of DSCR loan approvals. It directly impacts how lenders assess a property's capacity to cover its debt obligations.

<br>

### Correlation Between NOI And Debt Service Coverage Ratio

<br>

The Debt Service Coverage Ratio (DSCR) depends on the NOI, calculated by dividing NOI by total [debt service](https://www.offermarket.us/blog/dscr-loan-terms). Higher NOIs generally result in higher DSCRs, which indicate lower risk for lenders. For example, a property with an NOI of $120,000 and annual debt service of $90,000 has a DSCR of 1.33, signaling a 33% income surplus for covering debt payments. A DSCR above 1.25 is often required, with higher ratios improving approval prospects and loan terms.

<br>

### Impact Of Accurate NOI On Loan Decisions

<br>

Accurate NOI calculations provide [lenders](https://www.offermarket.us/blog/private-lender) with a reliable measure of a property's performance. Mistakes in identifying revenues or expenses can lower NOI, reducing DSCR and increasing the perceived risk. Conversely, a precisely calculated NOI can demonstrate strong cash flow, boosting confidence in the borrower's repayment ability. Errors like omitting maintenance costs or misclassifying revenue can distort NOI, leading to unfavorable loan decisions or higher interest rates.

<br>

## Related Metric: Cap Rate and How NOI Applies

<br>

Capitalization Rate (Cap Rate) \= Net Operating Income / Property Value  
 This metric helps investors evaluate the potential return on an investment based solely on the property's operations. NOI is central to Cap Rate, while DSCR focuses on the property's ability to repay a loan.

<br>

## Conclusion

<br>

Accurately calculating net operating income is a critical step in securing DSCR loans and evaluating a property's financial performance. By ensuring all income and operating expenses are properly accounted for, borrowers can present a clear picture of a property's profitability and its ability to meet debt obligations.

<br>

A reliable NOI calculation not only strengthens DSCR outcomes but also increases the chances of obtaining favorable loan terms. For real estate investors navigating the competitive market, mastering this process is essential for making sound financial decisions and minimizing lending risks.

<br>

## Frequently Asked Questions

<br>

**What is Net Operating Income (NOI)?**
<br> Net Operating Income (NOI) is a financial metric used to measure a property's profitability. It is calculated by subtracting operating expenses from total revenue, excluding financing costs and taxes. NOI helps determine how much income a property generates after covering essential operating costs.

<br>

**Why is NOI important for DSCR loans?**
<br> NOI is crucial for DSCR loans as it measures a property's profitability, directly influencing the Debt Service Coverage Ratio (DSCR). A higher NOI generally leads to a higher DSCR, indicating lower risk for lenders and improving the chances of loan approval with better terms.

<br>

**How is NOI calculated?**
<br> To calculate NOI, subtract a property's total operating expenses from its total revenue. Ensure you include all revenue streams and necessary expenses while excluding financing costs, taxes, and non-operating expenses. For example, if revenue is $150,000 and expenses are $50,000, the NOI is $100,000.

<br>

**What is a good DSCR ratio?**
<br> A good DSCR typically starts at 1.0, which means the property brings in just enough rent to cover PITIA. OfferMarket requires at least 1.0, but 1.2+ is often needed for better terms, especially if the borrower’s credit score is below 720.

<br>

**How does NOI affect DSCR?**
<br> NOI directly impacts DSCR, as the ratio is calculated by dividing NOI by total debt service. A higher NOI results in a higher DSCR, indicating better debt repayment ability and reducing lender risks. For instance, a $120,000 NOI with $90,000 in debt service yields a DSCR of 1.33.

<br>

**What are the common mistakes when calculating NOI?**
<br> Mistakes include misclassifying revenue, omitting irregular income, overlooking maintenance costs, or including non-operating expenses like financing costs. These errors can distort NOI, reduce DSCR, and negatively impact loan approvals or terms.

<br>

**What role does NOI play in real estate investing?**
<br> NOI serves as a key performance indicator for real estate investors, assessing a property's operational profitability. Accurate NOI calculations help investors evaluate a property's financial health and make informed decisions about purchasing, selling, or financing.

<br>

**Can a low NOI affect DSCR loan approval?**
<br> Yes, a low NOI can lead to a lower DSCR, signaling higher risk for lenders. This can reduce the likelihood of loan approval or result in unfavorable terms, such as higher interest rates or stricter lending requirements.

<br>

**Are taxes and financing costs included in NOI?**
<br> No, taxes and financing costs are excluded from NOI calculations. It focuses solely on operational revenue and expenses to provide a clear picture of a property's profitability, independent of external financial factors.

<br>

**How can inaccurate NOI impact DSCR loans?**
<br> Inaccuracies in calculating NOI can lead to an incorrect DSCR, misrepresenting a property's financial health. This may result in higher perceived risk, unfavorable loan terms, or even loan denial. Accurate calculations are essential to secure reliable and competitive DSCR loans.

<br>

## DSCR Loan Quote

<br>

![DSCR loan quote](https://cms.offermarket.us/uploads/DSCR_loan_quote_c3ae268aed.jpg)

<br>

Our mission is to help you build wealth through real estate. Let's grow and optimize your rental property portfolio!

<br>

- Get your instant [DSCR loan quote](https://www.offermarket.us/loans?ref=content-how-do-you-calculate-net-operating-income-for-dscr-loans) today!
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- Subscribe to our [Youtube channel](https://www.youtube.com/@offermarket) for our monthly DSCR loan update.

<br>


How do you calculate net operating income for DSCR loans? Discover the formula, essential tips, and step-by-step guidance to determine accurate NOI for loans.

How Do You Calculate Net Operating Income for DSCR Loans A Step-By-Step Guide

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How Do You Calculate Net Operating Income for DSCR Loans A Step-By-Step Guide.jpg

How Do You Calculate NOI for DSCR Loans?

How Do You Calculate Net Operating Income for DSCR Loans? A Step-By-Step Guide

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Private Lending | OfferMarket

Private Lending

Method 1: Gross Rent ÷ PITIA or ITIA

Method 2: NOI ÷ Debt Service

Comparing the DSCR Formulas

Why should you care about DSCR?

Join OfferMarket

**Last updated:** October 14, 2025

Quickly and accurately calculating [Debt Service Coverage Ratio](https://www.offermarket.us/blog/what-is-dscr-ratio) (DSCR) is critical when growing and optimizing your rental property portfolio.

By calculating DSCR, you can determine the loan amount a rental property will be eligible for, and the associated free cash flow it is projected to generate. A high DSCR signals financial strength, while a low DSCR raises concerns about the viability of a mortgaged rental property. It's a straightforward yet powerful tool that helps guide critical real estate investing decisions.

In this guide, we will share the two most commonly used DSCR formulas and provide you with analysis, examples and tools to help you invest successfully.

## Method 1: Gross Rent ÷ PITIA or ITIA

The industry standard and most commonly used DSCR formula for 1-4 unit residential properties is **Gross Rent ÷ [PITIA](https://www.offermarket.us/blog/pitia)** for a fully amortizing [DSCR loan](https://www.offermarket.us/dscr-loan) and **Gross Rent ÷ ITIA** for an [interest only DSCR loan](https://www.offermarket.us/blog/interest-only-dscr-loan).

---

![DSCR Formula: Gross Rent ÷ PITIA or ITIA](https://cms.offermarket.us/uploads/DSCR_Formula_Interest_Only_9bcd6c02ff.jpg)

---

Real estate investors should be cautioned about this method because it does not factor in real operating costs which include property management, maintenance and vacancy. For this reason, we advise all OfferMarket clients to focus on deals with DSCR safely above 1.0.

### How to think about property management

Property management is a real cost. Either you're going to be doing it (and it will consume a growing amount of your time as your portfolio grows), or you will outsource this to a 3rd party property management firm that will charge you off the top. If your DSCR is 1.0, not factoring in property management, then you will be bleeding money every month until you can raise your rents.

<div style="display: grid; grid-template-columns: repeat(1, minmax(0, 1fr)); overflow: auto; white-space: nowrap;">
<table><thead>
  <tr>
    <th>3rd Party Property Manager Fees</th>
    <th>Standard Fee</th>
  </tr></thead>
<tbody>
  <tr>
    <td>Monthly</td>
    <td>5% to 12% of rent</td>
  </tr>
  <tr>
    <td>Lease renewal</td>
    <td>$0 to $250 admin fee (per unit)</td>
  </tr>
  <tr>
    <td>Leasing: new tenants</td>
    <td>25% to 100% of 1st month's rent (per unit)</td>
  </tr>
</tbody>
</table>
</div>

### How to think about maintenance

Maintenance is a real, often very expensive cost. It's not uncommon to see rental property investors generating $250 free cash flow and then the refrigerator needs to be replaced. That right there will wipe out 3+ months of positive cash flow. What happens when the roof needs to be replaced? This is why higher DSCR, conservative reserves, and proactive maintenance is critical to long term rental property investing success.

### How to think about vacancy

Most new rental property investors run their numbers estimating rent at the top of the range and to make matters worse, they estimate that the property will be 100% occupied. In reality, the property may sit vacant, especially if you're outside of peak leasing season which tends to be June - August. When outside of peak leasing season, not only do you have low renter demand, you also have other landlords lowering their asking rents to fill their vacancies. Vacancies are a real cost of doing business and you should set your base case to expect it -- 5% vacancy is generally acceptable but a high DSCR at 10% vacancy signals a solid, safe investment.

## Method 2: NOI ÷ Debt Service

Multifamily lenders and banks tend to use this more conservative DSCR formula which, unlike the SFR version (Method 1), factors in vacancy, property management and maintenance. These are all very real expenses. What's more, when this stricter DSCR formula is used, it is often for loan programs where the minimum DSCR is 1.25.

Let's take a look at an example for a 5 unit multifamily property in Chicago, IL:

- Annual gross rent: $120,000
- Vacancy: 5%
- Annual property management: $12,000
- Annual taxes: $24,000
- Annual insurance: $5,000
- Annual maintenance: $10,000
- Term: 30 years
- Structure: full amortization
- Interest rate: 5% (fixed)
- Loan amount: $750,000

NOI = ($120,000 x 0.95) - $12,000 - $24,000 - $5,000 - $10,000 = $63,000

Debt Service = Principal + Interest = $48,313.95

DSCR = $63,000 ÷ $48,313.95 = 1.30

---

[![Interest Only DSCR Calculator](https://cms.offermarket.us/uploads/Interest_Only_DSCR_Calculator_491002911d.jpg)](https://www.offermarket.us/blog/dscr-calculator)

---

## Comparing the DSCR Formulas

By comparing the 2 DSCR formulas, we will get more familiar with how to calculate DSCR and we will see that the *NOI ÷ Debt Service* formula produces a lower DSCR because it factors in property management, vacancy and maintenance expenses. 

<div style="display: grid; grid-template-columns: repeat(1, minmax(0, 1fr)); overflow: auto; white-space: nowrap;">
<table><thead>
  <tr>
    <th>Property Type</th>
    <th>Standard Lending Formula</th>
    <th>Primary Focus</th>
  </tr></thead>
<tbody>
  <tr>
    <td>1–4 Unit Residential (SFR, Duplex, Quadplex)</td>
    <td>Rent ÷ PITIA</td>
    <td>Lending Qualification (Fixed Costs)</td>
  </tr>
  <tr>
    <td>5+ Unit, Mixed-Use, Commercial</td>
    <td>NOI ÷ Debt Service</td>
    <td>Business Viability (True Profit)</td>
  </tr>
</tbody>
</table>
</div>

Let's use a uniform example:

- Gross rent: $50,000
- Vacancy: 5%
- Annual property management: $5,000
- Annual taxes: $10,000
- Annual insurance: $2,500
- Annual HOA: $0
- Annual maintenance: $5,000
- Term: 30 years
- Structure: Full amortization
- Interest rate: 6.5% (fixed)
- Transaction type: Purchase
- Purchase price: $600,000
- Loan amount: $450,000 (75% LTV)

### Gross Rent ÷ PITIA

DSCR = $50,000 ÷ $46,632 = 1.07

### NOI ÷ Debt Service

NOI = (($50,000 x 0.95) - $5,000 - $10,000 - $2,500 - $5,000) = $25,000

Debt Service = Principal + Interest = $8,636.08 + $15,612.34 = $24,248.42

DSCR = $25,000 ÷ $24,248.42 = 1.03

## Why should you care about DSCR?

DSCR is a fancy acronym for cash flow. Cash flow is king. By focusing on rental properties that generate healthy cash flow under adverse and conservative conditions, you will build a rental portfolio that accumulates cash quickly, allowing you to reinvest in more properties.

Conversely, by cutting corners and focusing on rental properties with low DSCR to the point they become monthly drains on your cash balance, you will expose yourself to avoidable and very stressful risks.

---

[![DSCR loan quote](https://cms.offermarket.us/uploads/DSCR_loan_quote_62b32bf99b.jpg)](https://www.offermarket.us/loans?ref=content-dscr-formula)

---

## Join OfferMarket

OfferMarket is a real estate investing platform focused on serving rental property investors. We focus exclusively on 1-4 unit residential properties in non-rural markets, and our core business is DSCR lending. 

We hope you will **[accept our invitation](https://www.offermarket.us/listings?ref=content-dscr-formula)** to join us and over 20,000 registered members.

Membership is entirely free and comes with the following benefits:

🏚️ **[Off market properties](https://www.offermarket.us/listings?ref=content-dscr-formula)**</br>
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☂️ **[Landlord insurance rate shopping](https://www.offermarket.us/insurance?ref=content-dscr-formula)**</br>
💡 **[Market insights](https://www.youtube.com/channel/UCRoNHXFVgI36SV0QQpyf9fw)**</br>

Our mission is to help you build wealth through real estate and we look forward to your success!

---

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---

Understand the DSCR formula for calculating rental property debt service coverage ratio. Use OfferMarket's top-rated DSCR Calculator and invest with confidence!

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DSCR Formula for Rental Property Investors

Method 1: Gross Rent ÷ PITIA or ITIA

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