Being a rental property owner in Enterprise, gaining a thorough understanding of your net operating income (NOI) is both vital and empowering. This number, an essential metric for property owners, banks, and lenders, lets you evaluate your property’s performance.
We will explain how to calculate your NOI and inform you about the factors that can impact it.
What is net operating income (NOI)?
Net operating income (NOI) represents the annual income of a single-family rental property after deducting operating expenses. 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
There are multiple ways to calculate NOI, with the most common being subtracting operating expenses from a 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
Remember a few important factors when calculating your NOI. Initially, ensure you include all sources of income. This means accounting for rental income and other collected fees or charges, such as pet fees or parking fees.
Second, make sure to include only operating expenses. This consists of property taxes, insurance, and repairs. Mortgage payments and capital expenses (e.g., renovations) are excluded from this number.
Factors that can affect your NOI
Several elements can impact your NOI. You can control some of these factors, but others are beyond your control.
- Rental income: Your NOI will be directly impacted by the rental income you generate. If you can raise rent prices or lease to tenants who pay more, your NOI will go up.
- Operating expenses: Operating expenses may vary each year. Keeping these expenses down will result in a higher NOI.
- Interest rates: Having a mortgage on your rental property means that changes in interest rates can affect your NOI. Rising interest rates will lead to higher mortgage payments and a decrease in your NOI.
- Vacancy rates: When vacancy rates rise, rental income falls, leading to a lower NOI.
As demonstrated, numerous factors can affect your NOI. However, keep in mind that many of these factors are controllable. 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
Knowing how to calculate NOI allows you to leverage this knowledge for making informed real estate decisions. NOI can be a powerful tool when deciding on property purchases or comparing investment opportunities.
Here are a few ways to use NOI in practice:
- You’re planning to buy a rental property for $200,000. It has an NOI of $20,000. The NOI for the property is $20,000. This equates to a return on investment (ROI) of $20,000/$200,000, or 10%. With this favorable ROI, you decide to buy the property.
- You possess a rental property with an NOI of $15,000. You’re considering selling this property and using the funds to buy a different one. However, you come across another property that has an NOI of $30,000. Since this property will generate a higher return on investment, you decide to sell your current property and buy the new one.
- You’re thinking of purchasing a rental property for $100,000. The NOI of this property is $15,000. You come across another property for sale at $100,000. This property, however, has an NOI of $25,000. The second property provides a higher return on investment, so you decide to buy 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 Enterprise and nearby. If calculating NOI or ROI is not your strength, rest assured the professionals at Real Property Management Peace 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. Contact us today for more information.
Originally Published on June 24, 2022
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