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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.Being a rental property owner in Staunton, gaining a thorough understanding of your net operating income (NOI) is both vital and empowering. This critical figure, used by property owners, banks, and lenders, enables you to gauge 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)?

Net operating income (NOI) represents the annual income of a single-family rental property after deducting operating expenses. It includes rental income and other forms of income like laundry and parking fees. Mortgage payments and capital expenses (e.g., repairs or renovations) are not included.

How to Calculate NOI

Different methods can be used to calculate NOI, but the most common is to take the total income of the property 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

Consider a few key points when calculating your NOI. To start, be sure to include all income sources. This means accounting for rental income and other collected fees or charges, such as pet fees or parking fees.

Second, make sure to include only operating expenses. This consists of property taxes, insurance, and repairs. This total does not account for mortgage payments or capital expenses, such as renovations.

Factors that can affect your NOI

Numerous factors can influence your NOI. Certain factors are under your control, whereas others are not.

  • Rental income: The rental income you earn directly affects your NOI. Higher rent prices or leasing to tenants who pay more will result in a higher NOI.
  • Operating expenses: Operating expenses can change from year to year. Keeping these expenses down will result in a higher NOI.
  • Interest rates: If your rental property is mortgaged, variations in interest rates can impact your NOI. Rising interest rates will lead to higher mortgage payments and a decrease in your NOI.
  • Vacancy rates: When vacancy rates rise, rental income falls, leading to a lower NOI.

Clearly, various factors can impact your NOI. However, keep in mind that many of these factors are controllable. By regularly 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

Having learned how to calculate NOI, you can now apply this information to make informed real estate decisions. Whether you’re evaluating a property purchase or comparing various investments, NOI can be a crucial tool in your decision-making arsenal.

Here are a few practical examples of using NOI:

  1. You’re contemplating buying a rental property priced at $200,000 with an NOI of $20,000. This property earns an NOI of $20,000. This indicates a return on investment (ROI) of $20,000/$200,000, which is 10%. This ROI is favorable, so you choose to purchase the property.
  2. Your current rental property has an NOI of $15,000. You’re considering selling this property and using the funds to buy a different one. However, you come across another property that has an NOI of $30,000. Since this property will generate a higher return on investment, you decide to sell your current property and buy the new one.
  3. You’re planning to purchase a rental property for $100,000. The property provides an NOI of $15,000. You find another property also listed for $100,000. However, the NOI of this property is $25,000. The second property provides a higher return on investment, so you decide to buy it instead.

What’s the bottom line?

Knowing how to calculate NOI enables you to make intelligent real estate decisions and ensures your rental property performs well in Staunton and nearby. If calculating NOI or ROI is not your strength, rest assured the professionals at Real Property Management Summit are here to help. Our local office provides accurate data on your investment property’s profitability and competitiveness, tailored to your specific market. Contact us today for more information.

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