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The Essential Guide to Calculating Net Operating Income

A woman sitting at a desk, working on a laptop and surrounded by papers.As a Bethany rental property owner, thoroughly understanding your net operating income (NOI) is both essential and empowering. This critical figure, used by property owners, banks, and lenders, enables you to gauge your property’s performance.

We’ll walk you through calculating your NOI and explain the factors that can impact this number.

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

While there are various methods to calculate NOI, the most typical approach is to subtract operating expenses from the 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

Take note of a few things when calculating your NOI. Initially, ensure you include all sources of income. This covers rental income and other fees or charges you collect, including 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

Your NOI can be affected by various factors. Certain factors are under your control, whereas others are not.

  • Rental income: The rental income you produce will directly influence your NOI. If you can raise rent prices or lease to tenants who pay more, your NOI will go up.
  • Operating expenses: The operating expenses can differ each year. Lowering these expenses will increase your NOI.
  • Interest rates: If your rental property has a mortgage, fluctuations in interest rates can affect your NOI. Higher interest rates will raise your mortgage payments, thereby decreasing your NOI.
  • Vacancy rates: An increase in vacancy rates reduces rental income, thereby decreasing NOI.

As you can observe, multiple factors influence 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

Now that you understand how to calculate NOI, you can use this information to make educated real estate decisions. Whether you’re thinking about buying a property or evaluating different investments, NOI is a powerful tool in your decision-making process.

Below are a few examples of how NOI can be applied in practice:

  1. You’re thinking about buying a rental property for $200,000. It has an NOI of $20,000. This property earns an NOI of $20,000. This equates to a return on investment (ROI) of $20,000/$200,000, or 10%. This favorable ROI leads you to purchase the property.
  2. You possess a rental property with an NOI of $15,000. You’re thinking about selling the property and using the proceeds to buy a new one. 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.
  3. You’re considering buying a rental property for $100,000. This property has an NOI of $15,000. You discover another property also priced at $100,000. However, the NOI of this property is $25,000. The second property offers a higher return on investment, leading you to purchase it instead.

What’s the bottom line?

By learning to calculate NOI, you can make savvy real estate decisions and ensure your rental property performs well in Bethany and nearby. If calculating values like NOI or ROI isn’t your forte, don’t worry; the experts at Real Property Management Resources are here to assist. We can provide accurate data on your investment property’s profitability and competitiveness, tailored to your specific rental market, through our local office. Reach out to us today to find out more.

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