We bought a twenty-unit building in Mesa. The broker's package showed a trailing-twelve net operating income of $175,777. At a 5% cap that's a $3.5M building. At the price we were discussing, the math worked comfortably.
It worked because $66,000 of repairs weren't in it.
What he actually did
Nothing illegal, and nothing especially clever. The prior owner classified roughly $66,000 of repair spending as capital expenditure rather than operating expense. Capex sits below the NOI line. Repairs sit above it. Move an expense from one side of that line to the other and net operating income goes up without a single thing changing at the property.
Every dollar you move below the NOI line is worth about twenty dollars of building value at a 5% cap. That's the whole incentive.
Some of that $66,000 genuinely was capital — a roof, an HVAC replacement. Most of it wasn't. It was turn work: paint, flooring, appliances, the ordinary cost of getting a unit ready for the next resident. That's not capital improvement. That's the cost of being in this business.
What the building actually earns
| Line | As presented | Normalized |
|---|---|---|
| Reported T12 NOI | $175,777 | $175,777 |
| Repairs reclassified as capex | — | (~$62,000) |
| Working NOI | $175,777 | ~$114,000 |
A $61,000 swing in NOI. At a 5% cap, that's roughly $1.2M of value — on a deal in the low three millions.
We still bought it. But we bought it knowing what it earned, which is a different transaction than the one we were originally shown.
The four places it hides
This is the most common thing we find, and it's almost never the only one. When we normalize a seller's books we're looking for four specific moves:
- Repairs reclassified as capital. The one above. Ask for the general ledger, not the summary — and read the line-item descriptions, not the account names.
- No management fee. Owner-operators frequently show zero, because they don't pay themselves one. You will pay one, whether to a third party or to your own management company. Underwrite 5–8% depending on size.
- No vacancy or credit loss. A trailing twelve reflects what was collected, not what will be. If the seller shows 100% economic occupancy, they're showing you a number that has never been true for longer than a quarter.
- Property taxes pre-reassessment. Your purchase resets the assessed value. In Arizona this can move materially, and it moves the year after you close — long after everyone has agreed the deal was a good one.
We found the missing management fee and vacancy allowance on a different building, in Scottsdale. That one still shows slightly negative NOI growth against the seller's reported figures, and it stays in our track record that way. The seller's number was never real, so we never beat it.
How to catch it in ten minutes
Ask for three things before you spend money on inspections:
- The general ledger for the trailing twenty-four months, not the T12 summary
- Bank statements for the same period
- The current rent roll with lease start dates and any concessions
Then add back every line that looks like a turn. Add a management fee. Add 5% vacancy. Reassess the taxes. Whatever survives that is the building you're actually buying.
It takes ten minutes and it's the highest-return ten minutes in this business.
Figures reflect one specific transaction. Nothing here is investment, legal or tax advice. · ← All field notes