As a rental property owner in Downingtown, 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 will explain how to calculate your NOI and inform you about the factors that can impact it.
What is net operating income (NOI)?
The NOI, or net operating income, is the annual income of a single-family rental property after operating expenses are deducted. 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
There are multiple ways to calculate NOI, with the most common being subtracting operating expenses from a 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. Firstly, ensure all sources of income are included. 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 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
Various factors can influence your NOI. While some of these factors are controllable, others are not.
- 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: Yearly variations in operating expenses are common. Keeping these expenses down will result in a higher NOI.
- Interest rates: Changes in interest rates can impact your NOI if you have a mortgage on your rental property. An increase in interest rates raises mortgage payments, thus decreasing your NOI.
- Vacancy rates: When vacancy rates rise, rental income falls, leading to a lower NOI.
Evidently, several factors can impact your NOI. However, it’s key to remember that many of these factors are under your control. 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
Knowing how to calculate NOI allows you to leverage this knowledge for making informed real estate decisions. NOI can be a powerful tool when deciding on property purchases or comparing investment opportunities.
Here are a few ways to use NOI in practice:
- You’re planning to buy a rental property for $200,000. It has an NOI of $20,000. The NOI for the property is $20,000. This results in a return on investment (ROI) of $20,000/$200,000, or 10%. With this favorable ROI, you decide to buy the property.
- You currently own a rental property with 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. 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 provides an NOI of $15,000. You locate another property also for sale for $100,000. Yet, this property has 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 allows you to make smart real estate decisions and ensure your rental property performs effectively in Downingtown and its vicinity. If you find calculating NOI or ROI challenging, the professionals at Real Real Property Management Varanasi are available to help. Our local office can supply you with precise data on your investment property’s profitability and competitiveness, tailored to your rental market. Contact us today for more information.
Originally Published on June 24, 2022
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