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 various means to calculate NOI, however, the most familiar 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 several things to call to mind when calculating your NOI. First, make it a point 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, be certain only to include operating expenses. This involves things, such as property taxes, insurance, and repairs. Mortgage payments and capital expenses (such as renovations) are not covered in this number.
Factors that can affect your NOI
Plenty of components can affect your NOI. Many of these, certainly, are within your control, while others are not.
- Rental income: The amount of rental income you generate will swiftly have an impact on your NOI. If you can increase rent prices or lease to higher-paying tenants, your NOI will increase.
- Operating expenses: Your operating expenses can adjust 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, fluctuations in interest rates can affect your NOI. An increase in interest rates will definitely increase your mortgage payments, which will, in turn, decrease your NOI.
- Vacancy rates: A rise in vacancy rates will reduce rental income and, therefore, decrease NOI.
As discussed, many elements can affect your NOI. It’s vital to keep an eye on these factors and adjust as may be required.
How to use NOI to make smart real estate decisions
Now that you understand how to calculate NOI, you can take advantage of this information to bring about your best real estate resolutions and decisions. If you’re taking into account investing in a rental property, you can use the NOI to check beforehand whether the property is a really good investment. You can further utilize it to compare different properties and identify which one will generate the highest return on investment.
Here are a few examples of how NOI can be used in practice:
You’re looking into having a rental property for $200,000. The property has an NOI of $20,000. This means the property will bring on a return on investment (ROI) of $20,000/$200,000, or 10%. This is an excellent ROI, so you choose to buy the property.
You own a rental property with an NOI of $15,000. You’re thinking of selling the property and taking advantage of the gain to buy a different property. However, you find another property that has an NOI of $30,000. This property will give you a higher return on investment, so you conclude and choose to sell your current property and purchase the new one.
You’re seriously thinking about acquiring a rental property for $100,000. The property has an NOI of $15,000. You search for another property that’s also for sale for $100,000. But on the other hand, this property has an NOI of $25,000. The second property will generate a higher return on investment, so you turn around and decide on procuring it instead.
What’s the bottom line?
NOI is a beneficial metric for any Freehold property manager. By identifying how to calculate NOI, you can make use of it to make wise real estate decisions and make certain 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, take into account having the professionals at Real Property Management Performance do it for you. Our local office can effectively help you analyze your specific rental market and present accurate data on your investment property’s profitability and competitiveness. Contact us today to learn more.