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.
There are several ways to calculate NOI, but the most typical way is to subtract a property’s operating expenses from its total income. Consider the following example:
Total Income: $30,000
(subtract) Operating Expenses: $15,000
(equals) NOI: $30,000 – $15,000 = $15,000
When figuring out your NOI, there are some things to keep in mind. First, ensure that all sources of income are included. This includes rental income as well as any other fees or charges you receive (such as pet fees or parking fees). Second, make sure to use only operating expenses. This includes costs such as property taxes, insurance, and maintenance. This number does not include mortgage payments or capital expenditures (such as home improvements).
Factors that can affect your NOI.
Multiple variables can impact your NOI. Some of these are under your control, while others are out of your hands.
- Rental income: The sum of rental income you generate has a major effect on your net operating income. Your NOI will increase if you can boost rent prices or attract higher-paying tenants.
- Operating expenses: Your operating costs will fluctuate from year to year. Your NOI will rise if you can keep these costs low.
- Interest rates: Changes in interest rates can have an impact on your NOI if you have a mortgage on your rental 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.
Several variables can impact your NOI, as demonstrated. It’s crucial to keep an eye on these variables and make any necessary adjustments.
How to use NOI to make effective real estate choices.
Now that you understand how to calculate NOI, you can use this data to make informed real estate decisions. You can use the NOI to determine whether a rental property is a good investment if you are considering purchasing 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 NOI on the property is $20,000. This indicates that the property’s return on investment (ROI) will be 10 percent or $20,000/$200,000 invested. This is a good return on investment, so you end up purchasing the property.
Now you own a rental property with a $15,000 net operating income (NOI). You’re thinking about selling the house and using the proceeds to buy another one. However, you come across another property with a $30,000 NOI. Since this property will yield a higher return on investment, you decide to sell your current property and buy the new one.
You’re thinking about investing $100,000 in a rental property. The NOI on the property is $15,000. You come across another $100,000 property on the market. This property, on the other hand, has an NOI of $25,000. You agree to buy the second property instead of the first because it will generate a higher return on investment.
What’s the bottom line?
NOI is a useful metric for any Timberlake property manager. You can use NOI to make smart real estate decisions and ensure that your rental property is performing as it should be by understanding how to calculate it. However, if calculating values like NOI or ROI isn’t your strong suit, consider having the professionals at Real Property Management Trustworthy 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.