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 many strategies to calculate NOI, but the most popular 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 a few things to bear in mind when calculating your NOI. First, be sure 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). After that, be sure to only include operating expenses. This includes things like property taxes, insurance, and repairs. Mortgage payments and capital expenses (such as renovations) are not included in this number.
Factors that can affect your NOI
Several aspects can affect your NOI. Some of these are within your control, while others are not.
- Rental income: The amount of rental income you generate has a direct influence on your NOI. If you can increase rent prices or lease to higher-paying tenants, your NOI will increase.
- Operating expenses: Your operating expenses will fluctuate 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 raise your mortgage payments, which will, in turn, decrease your NOI.
- Vacancy rates: An rise in vacancy rates will reduce rental income and, therefore, decrease NOI.
As you can see, a variety of things can affect your NOI. It’s advisable to keep an eye on these factors and adjust as required.
How to use NOI to make smart real estate decisions
Now that you understand how to calculate NOI, you can utilize this information to make informed real estate decisions. If you’re thinking about acquiring a rental property, you can use the NOI to help assess whether the property is a wise investment. You can also use it to compare different properties and determine which one will generate the highest return on investment.
Here are a few examples of how NOI can be used in practice:
You’re thinking about obtaining a rental property for $200,000. The property has an NOI of $20,000. This means the property would provide the best return on investment (ROI) of $20,000/$200,000, or 10%. This is a good ROI, so you decide to purchase the property.
You own a rental property with an NOI of $15,000. You’re thinking of selling the property and utilizing the cash to buy a different property. However, you find another property that has an NOI of $30,000. This property will generate a higher return on investment, so you choose to sell your current property and purchase the new one.
You’re thinking of getting a rental property for $100,000. The property has an NOI of $15,000. You find another property that’s also for sale for $100,000. Yet this property has an NOI of $25,000. The second property will generate a larger return on investment, so you decide to purchase it instead.
What’s the bottom line?
NOI is a helpful metric for any Downingtown property manager. By understanding how to calculate NOI, you can use it to make smart real estate decisions and ensure 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, consider having the professionals at Real Property Management Varanasi do it for you. Our local office can help you analyze your specific rental market and give accurate data on your investment property’s profitability and competitiveness. Contact us today to learn more.