Being a rental property owner in Freehold, gaining a thorough understanding of your net operating income (NOI) is both vital and empowering. This metric, crucial for property owners, banks, and lenders, helps you assess your property’s performance.
We’ll guide you through the steps to calculate your NOI and help you understand the factors that influence it.
What is net operating income (NOI)?
The annual income of a single-family rental property, after deducting operating expenses, is known as net operating income (NOI). This figure encompasses rental income as well as other income sources, such as laundry and parking fees. Mortgage payments or capital expenses, including repairs or renovations, are not included.
How to Calculate NOI
While there are various methods to calculate NOI, the most typical approach 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
Remember a few important factors when calculating your NOI. First, include every source of income. This covers rental income and other fees or charges you collect, including pet fees or parking fees.
Secondly, only include operating expenses. This includes expenses such as property taxes, insurance, and repairs. It does not include mortgage payments or capital expenses, such as renovations.
Factors that can affect your NOI
Multiple factors can affect your NOI. Some of these factors are within your control, while others are not.
- Rental income: Your NOI will be directly impacted by the rental income you generate. Increasing rent prices or leasing to higher-paying tenants will raise your NOI.
- Operating expenses: Operating costs can fluctuate annually. By keeping these costs low, you can boost your NOI.
- Interest rates: Changes in interest rates can impact your NOI if you have a mortgage on your rental property. Rising interest rates will lead to higher mortgage payments and a decrease in your NOI.
- Vacancy rates: Higher vacancy rates will reduce rental income and thus lower your NOI.
Clearly, various factors can impact your NOI. It’s essential to remember that many factors affecting NOI are within your control. Monitoring and adjusting as necessary can help you maintain a healthy NOI and ensure your property remains profitable.
How to use NOI to make savvy real estate decisions
With your newfound knowledge of calculating NOI, you can use this information to make well-informed real estate decisions. Whether you’re thinking about buying a property or evaluating different investments, NOI is a powerful tool in your decision-making process.
Here are some practical examples of how to use NOI:
- You’re contemplating buying a rental property priced at $200,000 with an NOI of $20,000. The NOI for the property is $20,000. This provides a return on investment (ROI) of $20,000/$200,000, or 10%. With this favorable ROI, you decide to buy the property.
- You have a rental property with an NOI of $15,000. You’re thinking about selling the property and using the proceeds to buy a new one. Instead, you find another property with 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 contemplating purchasing a rental property priced at $100,000. The property generates an NOI of $15,000. You find another property available for $100,000. However, this property generates an NOI of $25,000. Since the second property has a higher return on investment, you choose to buy it 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 Freehold and nearby areas. If calculating values like NOI or ROI isn’t your forte, don’t worry; the experts at Real Property Management Performance are here to assist. Our local office offers accurate data on your investment property’s profitability and competitiveness, customized to your specific rental market. Contact us now to learn more.
Originally Published on June 24, 2022
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.
