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The Essential Guide to Calculating Net Operating Income

Enterprise Real Estate Investor Calculating NOIAs an Enterprise rental property owner, it’s crucial to figure out your net operating income (NOI). This figure is a key metric used by property owners to determine a property’s performance and is also used by banks and other lenders. This guide will walk you through the steps required to calculate your NOI. We’ll also discuss some of the factors that can affect this number.

What is net operating income (NOI)?

Net operating income (NOI) is a single-family rental property’s annual income after deducting operating expenses. This figure includes both rental income and other forms of income, such as laundry fees or parking fees. It does not include mortgage payments or capital expenses (such as repairs or renovations).

How to Calculate NOI

There are a few distinct ways to calculate NOI, but the most common way is to take a property’s total income and subtract its operating expenses. Here’s an example:

Total Income: $30,000
(subtract) Operating Expenses: $15,000
(equals) NOI: $30,000 – $15,000 = $15,000

There are several things to keep in mind when calculating your NOI. First, make sure you include all sources of income. This means rental income from tenants and any other fees or charges you collect (such as pet fees or parking fees). Second, be sure only to include operating expenses. This includes things like property taxes, insurance, and repairs. Mortgage payments and capital expenses (such as renovations) are not integrated into this number.

Factors that can affect your NOI

Many considerations can affect your NOI. Some of these are within your control, while others are not.

  • Rental income: The amount of rental income you generate will directly influence your NOI. If you can increase rent prices or lease to higher-paying tenants, your NOI will increase.
  • Operating expenses: Your operating expenses can vary from year to year. If you can keep these costs down, your NOI will increase.
  • Interest rates: If you have a mortgage on your rental property, variations in interest rates can affect your NOI. A rise in interest rates will increase your mortgage payments, which will, in turn, decrease your NOI.
  • Vacancy rates: An increase in vacancy rates will decrease rental income and, therefore, decrease NOI.

As you can see, different factors can affect your NOI. It’s important to keep an eye on these factors and adjust as needed.

How to use NOI to make smart real estate decisions

Now that you know how to calculate NOI, you can use this information to make smart real estate decisions. If you’re considering purchasing a rental property, you can use the NOI to help determine whether the property is a good investment. You can also use it to compare different properties and see which one will generate the highest return on investment.

Here are a few examples of how NOI can be used in practice:

You’re thinking about purchasing a rental property for $200,000. The property has an NOI of $20,000. This means the property will produce a return on investment (ROI) of $20,000/$200,000, or 10%. This is a good ROI, so you decide to purchase the property.

You own a rental property with an NOI of $15,000. You’re considering selling the property and using the proceeds to purchase a different property. However, you find another property that has an NOI of $30,000. This property will generate a higher return on investment, so you decide to sell your current property and purchase the new one.

You’re contemplating purchasing a rental property for $100,000. The property has an NOI of $15,000. You find another property that’s also for sale for $100,000. However, this property has an NOI of $25,000. The second property will generate a higher return on investment, so you decide to purchase it instead.

What’s the bottom line?

NOI is a helpful metric for any Enterprise property manager. By understanding how to calculate NOI, you can use it to make smart real estate decisions and ensure that your rental property is performing as well as it should be. However, if calculating values like NOI or ROI isn’t your strong suit, consider having the professionals 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.

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