What is net operating income (NOI)?
After deducting operating expenses, the annual income from a single-family rental property is its net operating income (NOI). This figure contains rental income as well as other sources of income like laundry or parking fees. Mortgage payments and capital expenditures are not included (such as repairs or renovations).
How to Calculate NOI.
The most common process for calculating NOI, although there are many, is to subtract the operating expenses from the property’s total income. As an illustration, consider the following:
Total Income: $30,000
(subtract) Operating Expenses: $15,000
(equals) NOI: $30,000 – $15,000 = $15,000
When calculating your NOI, there are a few things to consider. Firstly, make a list of all of your income sources. This includes rental income from tenants, as well as any other fees or charges you may earn (such as pet fees or parking fees). Second, ensure that only operating expenses are included. This includes expenses such as property taxes, insurance, and repairs. This figure excludes mortgage payments and capital expenses (such as renovations).
Factors that can affect your NOI.
Numerous variables can affect your NOI. Some of these are in your control, while others are out of your reach.
- Rental income: Your NOI is directly influenced by the amount of rental income you generate. If you can raise rents or attract higher-paying tenants, your NOI will increase.
- Operating costs: Your operating costs can fluctuate season to season. Your NOI will increase if you can keep these costs low.
- Interest rates: Changes in interest rates can affect your NOI if you have a mortgage on your rental property. Your mortgage payments will increase as a result of a rise in interest rates, which will decrease your NOI.
- Vacancy rates: As vacancy rates rise, rental income declines and NOI declines as well.
As you can see, a variety of factors can have an impact on your NOI. It’s critical to keep an eye on these variables and make adjustments as needed.
How to use net operating income (NOI) to make informed real estate decisions.
Now that you understand how to calculate NOI, you can utilize this information to make informed decisions regarding real estate. If you’re thinking about buying a rental property, the NOI can help you figure out whether it’s a good investment. You can also use it to compare properties to determine which will yield the highest return on investment.
Here are some examples of NOI’s practical application:
You’re hoping to spend $200,000 on a rental property. The property has an NOI of $20,000. This indicates that the property will generate a return on investment (ROI) of $20,000/$200,000, or 10%. This is a good return on investment, so you decide to buy the property.
You become the owner of a rental property with an NOI of $15,000. You’re planning on selling the house and using the proceeds to buy a new one. However, you discover another property with a $30,000 NOI. You choose to sell your present property and buy the new one because this one will generate a higher return on investment.
You’re thinking about spending $100,000 on a rental property. The property’s NOI is $15,000. You discover a different $100,000 property for sale. However, the NOI for this property is $25,000. You decide to purchase the second property because it will produce a higher return on investment.
What’s the bottom line?
The net operating income (NOI) is a useful metric for any Plainsboro property manager. By knowing how to calculate NOI, you can make informed real estate decisions and ensure your rental property is performing as it should. However, if calculating values like NOI or ROI isn’t your strong suit, consider having the professionals at Real Property Management All-Star do it for you. Our local office can help you analyze your specific rental market and give accurate data on your investment property’s profitability and competitiveness. Contact us today to learn more.