---
id: "prereq-noi-calculation"
type: "prereq"
source_timestamps: ["00:27:00"]
tags: ["finance", "valuation"]
related: ["concept-infinite-return", "concept-occupancy-over-rent"]
reason: "Understanding how operational improvements increase NOI is required to grasp how McElroy forces appreciation and executes cash-out refinances."
sources: ["mcelroy"]
sourceVaultSlug: "mcelroy-multifamily-distress-playbook-2026Jun25"
originDay: 9
---
# Net Operating Income (NOI)

## Why This Matters

The conversation assumes the listener understands **Net Operating Income (NOI)** and how it dictates commercial property valuation. [[entity-ken-mcelroy]]'s strategy of forcing appreciation relies entirely on the formula:

> **Value = NOI / Cap Rate**

## Quick Refresher

- **NOI** = Gross rental income + other income − operating expenses (excluding debt service, depreciation, and CapEx).
- A small lift in NOI produces a much larger lift in **value** because it's divided by the (small) cap rate.
- Example: a $100K NOI increase at a 5% cap rate = **$2M of created value**.

## Where This Connects

- [[concept-infinite-return]]: refinancing depends on the new, higher NOI driving a new, higher appraised value.
- [[concept-occupancy-over-rent]]: McElroy's tenant-retention strategy is justified because it raises *realized* (cash) NOI even if headline rents are lower.
- [[framework-deal-evaluation-triad]]: test #2 (day-one cash flow) requires you to underwrite *current* NOI honestly, not a hoped-for future NOI.