As a Timberlake rental property owner, fully grasping your net operating income (NOI) is essential and empowering. This critical figure, used by property owners, banks, and lenders, enables you to gauge your property’s performance.
We’ll teach you the steps to determine your NOI and the factors that can influence this figure.
What is net operating income (NOI)?
The annual income of a single-family rental property, after deducting operating expenses, is known as net operating income (NOI). It includes rental income and other forms of income like laundry and parking fees. This figure 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
Consider a few key points when calculating your NOI. Firstly, ensure all sources of income are included. This covers rental income and other fees or charges you collect, including pet fees or parking fees.
Next, include only operating expenses. This covers property taxes, insurance, and repairs. This figure excludes mortgage payments and capital expenses, like renovations.
Factors that can affect your NOI
Your NOI can be affected by various factors. Some factors you can control, while others you cannot.
- Rental income: The rental income you produce will directly influence your NOI. By increasing rent prices or leasing to higher-paying tenants, you can boost your NOI.
- Operating expenses: Operating expenses may vary each year. If you control these costs, your NOI will grow.
- Interest rates: If your rental property has a mortgage, fluctuations in interest rates can affect your NOI. Increased interest rates will result in higher mortgage payments, reducing your NOI.
- Vacancy rates: Rising vacancy rates result in decreased rental income and subsequently lower NOI.
Evidently, several factors can impact your NOI. It’s essential to remember that many factors affecting NOI are within your control. By regularly monitoring and adjusting, you can maintain a healthy NOI and ensure your property’s profitability.
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.
Here are several practical examples of using NOI:
- 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 translates to a return on investment (ROI) of $20,000/$200,000, or 10%. This ROI is favorable, so you choose to purchase the property.
- You currently own 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. You find another property that generates an NOI of $30,000. This property provides a higher return on investment, so you opt to sell your current property and acquire the new one.
- You are thinking about buying a rental property for $100,000. This property earns an NOI of $15,000. You discover another property also priced at $100,000. Meanwhile, this property has an NOI of $25,000. The second property offers a higher return on investment, leading you to purchase it instead.
What’s the bottom line?
Understanding how to calculate NOI allows you to make smart real estate decisions and ensure your rental property performs effectively in Timberlake and its vicinity. Should you find calculating values like NOI or ROI difficult, know that the professionals at Real Real Property Management Trustworthy are here to help. Our local office can deliver accurate data on your investment property’s profitability and competitiveness, customized to your specific rental market. Get in touch today to learn more.
Originally Published on June 24, 2022
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