Being a rental property owner in Richmond, gaining a thorough understanding of your net operating income (NOI) is both vital and empowering. This number, an essential metric for property owners, banks, and lenders, lets you evaluate your property’s performance.
We’ll guide you through the steps to calculate your NOI and help you understand the factors that influence it.
What is net operating income (NOI)?
Net operating income (NOI) is the yearly income of a single-family rental property minus operating expenses. This figure encompasses rental income as well as other income sources, such as laundry and parking fees. This excludes mortgage payments and capital expenses, such as repairs or renovations.
How to Calculate NOI
There are multiple ways to calculate NOI, with the most common being subtracting operating expenses from a property’s total income. Here’s an example:
- Total income: $30,000
- (subtract) Operating Expenses: $15,000
- (equals) NOI: $30,000 – $15,000 = $15,000
Remember a few important factors when calculating your NOI. Initially, ensure you include all sources of income. This encompasses rental income from tenants as well as any additional fees or charges, like pet fees or parking fees.
Secondly, be sure to include only operating expenses. This involves property taxes, insurance, and repairs. Mortgage payments and capital expenses, such as renovations, are not included.
Factors that can affect your NOI
Various factors can influence your NOI. While some of these factors are controllable, others are not.
- Rental income: The amount of rental income you generate has a direct impact on your NOI. Higher rent prices or leasing to tenants who pay more will result in a higher NOI.
- Operating expenses: The operating expenses can differ each year. Keeping these expenses down will result in a higher NOI.
- Interest rates: If your rental property is mortgaged, variations in interest rates can impact your NOI. Rising interest rates will lead to higher mortgage payments and a decrease in your NOI.
- Vacancy rates: Higher vacancy rates will reduce rental income and thus lower your NOI.
As demonstrated, numerous factors can affect your NOI. Yet, it’s crucial to remember that many factors are within your control. Monitoring and adjusting as necessary can help you maintain a healthy NOI and ensure your property remains profitable.
How to use NOI to make savvy real estate decisions
Equipped with the knowledge of calculating NOI, you can now use this information to make smart real estate decisions. NOI can be a powerful tool when deciding on property purchases or comparing investment opportunities.
Here are a few practical examples of using NOI:
- You’re contemplating buying a rental property priced at $200,000 with an NOI of $20,000. This property has an NOI of $20,000. This results in a return on investment (ROI) of $20,000/$200,000, or 10%. With this favorable ROI, you decide to buy the property.
- You possess a rental property with an NOI of $15,000. You are contemplating selling the property and using the proceeds to purchase another property. However, you locate another property with an NOI of $30,000. This property offers a higher return on investment, prompting you to sell your current property and purchase the new one.
- You’re considering buying a rental property for $100,000. The property generates an NOI of $15,000. You locate another property also for sale for $100,000. Yet, this property has an NOI of $25,000. Since the second property has a higher return on investment, you choose to buy it instead.
What’s the bottom line?
Knowing how to calculate NOI enables you to make intelligent real estate decisions and ensures your rental property performs well in Richmond and nearby. If you’re not comfortable calculating NOI or ROI, the experts at Real Property Management Sugarland are here to assist you. We can provide accurate data on your investment property’s profitability and competitiveness, tailored to your specific rental market, through our local office. Contact us today for more information.
Originally Published on June 24, 2022
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