As a rental property owner in Hallandale, understanding your net operating income (NOI) comprehensively is not only essential but empowering. This important metric, relied on by property owners, banks, and lenders, allows you to measure your property’s performance.
We’ll walk you through calculating your NOI and explain the factors that can impact this number.
What is net operating income (NOI)?
Net operating income (NOI) represents the annual income of a single-family rental property after deducting operating expenses. This total includes rental income and other income streams, such as laundry and parking fees. This figure excludes mortgage payments and capital expenses, such as repairs or renovations.
How to Calculate NOI
Several methods exist to calculate NOI, but the most common is to subtract operating expenses from the 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
Take note of a few things when calculating your NOI. To start, be sure to include all income sources. This includes tenant rental income and any other fees or charges you collect, like pet fees or parking fees.
Next, ensure only operating expenses are included. This involves property taxes, insurance, and repairs. This total does not account for mortgage payments or capital expenses, such as renovations.
Factors that can affect your NOI
Numerous factors can influence your NOI. Some factors you can control, while others you cannot.
- Rental income: The amount of rental income you generate has a direct impact on your NOI. By increasing rent prices or leasing to higher-paying tenants, you can boost your NOI.
- Operating expenses: The operating expenses can differ each year. If you manage to reduce these costs, your NOI will rise.
- Interest rates: Interest rate changes can affect your NOI if your rental property is mortgaged. An increase in interest rates raises mortgage payments, thus decreasing your NOI.
- Vacancy rates: An increase in vacancy rates reduces rental income, thereby decreasing NOI.
As demonstrated, numerous factors can affect your NOI. However, keep in mind that many of these factors are controllable. Through 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
Having learned how to calculate NOI, you can now apply this information to make informed real estate decisions. Whether considering a property purchase or comparing investment opportunities, NOI is a valuable tool in your decision-making toolkit.
Here are several practical examples of using NOI:
- You’re looking at purchasing a rental property for $200,000. It has 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%. This favorable ROI leads you to purchase the property.
- Your current rental property has an NOI of $15,000. You are considering selling the property and investing the proceeds in another property. You discover another property with an NOI of $30,000. This property offers a higher return on investment, prompting you to sell your current property and purchase the new one.
- You’re planning to purchase a rental property for $100,000. The NOI of this property is $15,000. You find another property also listed for $100,000. Meanwhile, this property has an NOI of $25,000. With a higher return on investment, you decide to buy the second property instead.
What’s the bottom line?
Understanding how to calculate NOI allows you to make smart real estate decisions and ensure your rental property performs effectively in Hallandale and its vicinity. If you’re not comfortable calculating NOI or ROI, the experts at Real Property Management Allegiance are here to assist you. We can provide accurate data on your investment property’s profitability and competitiveness, tailored to your specific rental market, through our local office. Get in touch with us today to learn more.
Originally Published on June 24, 2022
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