What is net operating income (NOI)?
Net operating income (NOI) is the annual income of a single-family rental property after deducting operating expenses. This number includes both rental income and other types of income, like laundry fees and parking fees. This does not include mortgage payments or capital expenses (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. Here’s an illustration:
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. First of all, ensure that all income sources are accounted for. This includes rental income from tenants and any additional fees you collect (such as pet fees or parking fees). Second, make sure that only operating expenses are included. This includes costs such as property taxes, insurance, and maintenance. This figure does not include mortgage payments or capital expenditures (such as renovations).
Factors that can affect your NOI.
Multiple variables can impact your NOI. Some of these are under your control, while others are beyond your control.
- Rental income: Your NOI is directly affected by the level of rental income you generate. Your NOI will start rising if you can raise rent prices or lease to more expensive tenants.
- Operating expenses: Your operating expenses can change frequently from year to year. If you can reduce these costs, your NOI will increase.
- Interest rates: Differences in interest rates can impact your NOI if you have a mortgage on your investment property. Growth in interest rates will increase your mortgage payments, lowering your net operating income.
- Vacancy rates: As vacancy rates rise, rental income falls, and NOI falls as well.
As you can see, your NOI can be influenced by a variety of factors. It is essential to monitor and adjust these variables as necessary.
How to use net operating income (NOI) to make better real estate decisions.
You can use this info to make intelligent real estate decisions now that you know how to calculate NOI. You can use the NOI to help you decide whether or not a rental property is a good investment if you’re thinking about buying one. You can also use it to compare properties to see which one will provide the best return on investment.
So here are a few examples of NOI’s application in practice:
You are contemplating the purchase of a $200,000 rental property. The property has a net operating income of $20,000. This indicates that the property will generate a return on investment (ROI) of $20,000/$200,000, or 10%. Because this is a good return on investment, you decide to buy the property.
You become the owner of a rental property with an NOI of $15,000. You’re thinking about selling the house and putting the money toward 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 are proposing investing $100,000 in a rental property. The property has a $15,000 NOI. You discover a second property that is also available for $100,000. This property, on the other hand, has an NOI of $25,000. You prefer to purchase the second property because it will generate a higher return on investment.
What’s the bottom line?
NOI is a useful metric for any Richmond property manager. By knowing how to calculate NOI, you can ensure that logical choices are made and that 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 Sugarland 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.