As a Fishers 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)?
Net operating income (NOI) is the yearly income of a single-family rental property minus operating expenses. This amount comprises rental income and additional income sources like laundry fees or parking fees. Mortgage payments and capital expenses, like repairs or renovations, are not part of this figure.
How to Calculate NOI
Various methods are available to calculate NOI, but the most frequent one involves 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
Be mindful of a few critical elements when calculating your NOI. First, make sure to account for all income sources. This includes tenant rental income and any other fees or charges you collect, like pet fees or parking fees.
Next, include only operating expenses. This includes expenses such as 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. While some of these factors are controllable, others are not.
- Rental income: The amount of rental income you generate has a direct impact on your NOI. Increasing rent prices or leasing to higher-paying tenants will raise your NOI.
- Operating expenses: Yearly variations in operating expenses are common. By keeping these costs low, you can boost your NOI.
- 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. Yet, it’s crucial to remember that many factors are within your control. By keeping track and making adjustments, you can sustain a healthy NOI and secure your property’s profitability.
How to use NOI to make savvy real estate decisions
Equipped with the knowledge of calculating NOI, you can now use this information to make smart real estate decisions. Whether you’re considering buying a property or comparing investment opportunities, NOI is a powerful asset in your decision-making toolkit.
Here are a few practical examples of using NOI:
- You’re contemplating buying a rental property priced at $200,000 with an NOI of $20,000. The NOI for this property is $20,000. This indicates a return on investment (ROI) of $20,000/$200,000, which is 10%. Seeing this good ROI, you choose to buy the property.
- Your rental property has an NOI of $15,000. You are considering selling the property and investing the proceeds in another property. You find another property that generates an NOI of $30,000. With a higher return on investment, you choose to sell your current property and buy 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. Yet, this property has an NOI of $25,000. Given the higher return on investment, you opt to purchase the second property instead.
What’s the bottom line?
Understanding how to calculate NOI helps you make informed real estate decisions and ensures your rental property performs optimally in Fishers and nearby areas. If calculating values like NOI or ROI isn’t your forte, don’t worry; the experts at Real Property Management Faith are here to assist. Our local office can supply you with precise data on your investment property’s profitability and competitiveness, tailored to your rental market. Contact us now to learn more.
Originally Published on June 24, 2022
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