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The Essential Guide to Calculating Net Operating Income

A woman sitting at a desk, working on a laptop and surrounded by papers.As a rental property owner in Westerville, understanding your net operating income (NOI) comprehensively is not only essential but 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 net operating income (NOI) is the annual revenue of a single-family rental property after subtracting operating expenses. This figure encompasses rental income as well as other income sources, such as laundry and parking fees. Mortgage payments and capital expenses (e.g., repairs or renovations) are not included.

How to Calculate NOI

Several methods exist to calculate NOI, but the most common 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

Consider a few key points when calculating your NOI. To start, be sure to include all income sources. This encompasses rental income from tenants as well as any additional fees or charges, like pet fees or parking fees.

Secondly, only include operating expenses. This encompasses property taxes, insurance, and repairs. Mortgage payments and capital expenses (e.g., renovations) are excluded from this number.

Factors that can affect your NOI

Various factors can influence your NOI. You can control some of these factors, but others are beyond your control.

  • Rental income: Your NOI is directly influenced by the rental income you generate. If you raise rent prices or lease to higher-paying tenants, your NOI will rise.
  • Operating expenses: The operating expenses can differ each year. Lowering these expenses will increase your NOI.
  • Interest rates: Interest rate changes can affect your NOI if your rental property is mortgaged. An increase in interest rates raises mortgage payments, thus decreasing your NOI.
  • Vacancy rates: Higher vacancy rates will reduce rental income and thus lower your NOI.

As demonstrated, numerous factors can affect your NOI. Nonetheless, it’s important to note that many of these factors can be controlled. 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

Knowing how to calculate NOI allows you to leverage this knowledge for making informed real estate decisions. Whether considering a property purchase or comparing investment opportunities, NOI is a valuable tool in your decision-making toolkit.

Here are some practical examples of how to use NOI:

  1. You’re contemplating buying a rental property priced at $200,000 with an NOI of $20,000. The property generates an NOI of $20,000. This translates to a return on investment (ROI) of $20,000/$200,000, or 10%. This ROI is favorable, so you choose to purchase the property.
  2. Your current rental property has an NOI of $15,000. You are contemplating selling the property and using the proceeds to purchase another property. Instead, you find another property with an NOI of $30,000. This property will yield a higher return on investment, leading you to sell your current property and buy the new one.
  3. You’re thinking of purchasing a rental property for $100,000. The property generates an NOI of $15,000. You locate another property also for sale for $100,000. This property, however, has an NOI of $25,000. With a higher return on investment, you decide to buy the second property instead.

What’s the bottom line?

By knowing how to calculate NOI, you can make wise real estate decisions and ensure your rental property performs well in Westerville and surrounding areas. If you’re not comfortable calculating NOI or ROI, the experts at Real Property Management Clarity Central are here to assist you. We can provide accurate data on your investment property’s profitability and competitiveness, tailored to your specific rental market, through our local office. Reach out to us today to find out more.

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