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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 Dearborn, gaining a thorough understanding of your net operating income (NOI) is both vital and empowering. This figure, vital for property owners, banks, and lenders, provides a means to 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 annual income of a single-family rental property, after deducting operating expenses, is known as net operating income (NOI). It comprises rental income along with other income types, such as 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 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

Numerous factors can influence your NOI. Some of these factors are within your control, while others are not.

  • Rental income: Your NOI is directly influenced by the rental income you generate. Increasing rent prices or leasing to higher-paying tenants will raise your NOI.
  • Operating expenses: Operating expenses can change from year to year. If you control these costs, your NOI will grow.
  • Interest rates: Interest rate changes can affect your NOI if your rental property is mortgaged. Rising interest rates will lead to higher mortgage payments and a decrease in your NOI.
  • Vacancy rates: Higher vacancy rates will reduce rental income and thus lower your NOI.

As demonstrated, numerous factors can affect your NOI. It’s essential to remember that many factors affecting NOI are within your control. By observing and tweaking as required, you can keep a healthy NOI and guarantee your property’s profitability.

How to use NOI to make savvy real estate decisions

With your newfound knowledge of calculating NOI, you can use this information to make well-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 some practical examples of how to use NOI:

  1. You’re considering buying a rental property for $200,000, which has 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 find another property also listed for $100,000. However, this property generates an NOI of $25,000. With a higher return on investment, you decide to buy the second property instead.

What’s the bottom line?

Understanding how to calculate NOI helps you make informed real estate decisions and ensures your rental property performs optimally in Dearborn and nearby areas. If calculating NOI or ROI is not your strength, rest assured the professionals at Real Property Management Main are here to help. Our local office provides accurate data on your investment property’s profitability and competitiveness, tailored to your specific market. Get in touch today to learn more.

 

Originally Published on June 24, 2022

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