What is net operating income (NOI)?
The yearly income of a single-family rental property after operating costs is called net operating income (NOI). This figure includes rental income as well as other sources of revenue such as laundry or parking fees. Mortgage payments and capital expenditures are not included (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. As an illustration, consider the following:
Total Income: $30,000
(subtract) Operating Expenses: $15,000
(equals) NOI: $30,000 – $15,000 = $15,000
When calculating your NOI, there are a few things to keep in mind. Firstly, make a list of all of your income sources. This includes rental income from tenants, as well as any other fees or charges you may earn (such as pet fees or parking fees). Second, ensure that only operating expenses are included. Property taxes, insurance, and repairs should be included in this. This figure excludes mortgage payments and capital expenses (such as renovations).
Factors that can affect your NOI.
Numerous variables can affect your NOI. Some of these are in your control, while others are out of your reach.
- Rental income: The amount of rental income you generate has a direct impact on your net operating income (NOI). Your NOI will rise if you can raise rent prices or lease to better-paying tenants.
- Operating expenses: Your operating expenses will rise or fall year to year. If you can reduce these expenses, your NOI will rise.
- Interest rates: Shifting interest rates can impact your NOI if you have a mortgage on your rental property. A rise in interest rates will result in higher mortgage payments, which will reduce your NOI.
- Vacancy rates: An increase in vacancy rates will reduce rental income and, consequently, net operating income (NOI).
A number of variables can impact your NOI. It’s crucial to keep an eye on these variables and make any necessary adjustments.
How to use net operating income (NOI) to make sensible real estate decisions
Now that you understand how to calculate NOI, you can use this data to make informed real estate decisions. If you’re thinking about buying a rental property, the NOI can help you figure out whether it’s a good investment. It can also be used to compare different properties to see which one will provide the best return on investment.
Here are some examples of how NOI can be applied in the real world:
You’re hoping to spend $200,000 on a 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 decide to buy the property.
Now you own a rental property with a $15,000 net operating income (NOI). You are contemplating selling the property and reinvesting the proceeds in a different property. Yet you locate a different property with an NOI of $30,000. You decide to sell your current property and buy this one because it will generate a higher return on investment.
You’re thinking about spending $100,000 on a rental property. The property’s NOI is $15,000. You discover a different $100,000 property for sale. This property, however, has an NOI of $25,000. You decide to purchase the second property because it will produce a higher return on investment.
What’s the bottom line?
The net operating income (NOI) is a useful metric for any Fishers property manager. By knowing how to calculate NOI, you can make informed real estate decisions and ensure your rental property is performing as it should. However, if calculating values like NOI or ROI isn’t your strong suit, consider having the professionals at Real Property Management Faith 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.