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 several different approaches to calculating NOI, but certainly, the most usual method 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 various things to remember when calculating your NOI. First, be certain to 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, make it a point only to include operating expenses. This comprises things such as property taxes, insurance, and repairs. Mortgage payments and capital expenses (such as renovations) are not part of this number.
Factors that can affect your NOI
Several elements can affect your NOI. The majority of these are within your control, while others are not.
- Rental income: The amount of rental income you generate will immediately 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 change 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. Growth in interest rates will raise your mortgage payments, which will, in turn, decrease your NOI.
- Vacancy rates: An increase in vacancy rates will lower down rental income and, therefore, decrease NOI.
As you can very well see, some components can affect your NOI. It’s necessary to keep an eye on these factors and adjust according to your need.
How to use NOI to make smart real estate decisions
Now that you comprehend how to calculate NOI, you can utilize this information to make wise real estate decisions and choices. If you’re looking into having a rental property, you can use the NOI to know whether the property is an excellent investment. You can additionally take advantage of it to compare different properties and discover which one will generate the highest return on investment.
Here are a few examples of how NOI can be used in practice:
You’re taking into account buying a rental property for $200,000. The property has an NOI of $20,000. This means the property will make a return on investment (ROI) of $20,000/$200,000, or 10%. This is a nice ROI, so you decide to obtain the property.
You own a rental property with an NOI of $15,000. You’re looking into selling the property and utilizing the revenue to acquire a different property. However, you find another property that has an NOI of $30,000. This property will bring on a higher return on investment, so you choose to sell your current property and purchase the new one.
You’re thinking of buying a rental property for $100,000. The property has an NOI of $15,000. You learn about another property that’s also for sale for $100,000. Although, this property has an NOI of $25,000. The second property will generate a higher return on investment, so you think about obtaining it instead.
What’s the bottom line?
NOI is a needed metric for any Hallandale property manager. By grasping well how to calculate NOI, you can put it to use to make great real estate decisions and be sure 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, look into having the professionals at Real Property Management Allegiance do it for you. Our local office can assist you to analyze your specific rental market and send accurate data on your investment property’s profitability and competitiveness. Contact us today to learn more.