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 several different methods to calculate NOI, but the most typical 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 several factors to remember when calculating your NOI. Initially, make 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). Next, be sure only to include operating expenses. This covers expenses such as 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 things can affect your NOI. Some of these are within your control, while others are not.
- Rental income: The amount of rental income you generate will personally affect your NOI. If you can increase rent prices or lease to higher-paying tenants, your NOI will increase.
- Operating expenses: Your operating expenses might 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, changes in interest rates can affect your NOI. A rise in interest rates will raise your mortgage payments, which will, in turn, decrease your NOI.
- Vacancy rates: An increase in vacancy rates will lower rental income and, therefore, decrease NOI.
As demonstrated, many aspects can affect your NOI. It’s critical to keep an eye on these factors and adjust as required.
How to use NOI to make smart real estate decisions
Since you know how to calculate NOI, you can utilize this information to make smart real estate choices. If you’re thinking about buying a rental property, you can use the NOI to assist in determining whether the property is an excellent investment. You can also use it to compare different properties and find which one will generate the highest return on investment.
Here are a few examples of how NOI can be used in practice:
You’re considering purchasing a rental property for $200,000. The property has an NOI of $20,000. This means the property will generate a 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 considering selling the property and using the proceeds to purchase a different property. However, you find another property that has an NOI of $30,000. This property will yield a higher return on investment, so you opt to sell your current property and purchase the new one.
You’re contemplating acquiring a rental property for $100,000. The property has an NOI of $15,000. You locate another property that’s also for sale for $100,000. But, this property has an NOI of $25,000. The second property will generate a higher return on investment, so you opt to acquire it instead.
What’s the bottom line?
NOI is a valuable metric for any Dearborn property manager. By knowing how to calculate NOI, you can use it to make smart real estate decisions and guarantee 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, think about having the professionals at Real Property Management Main do it for you. Our local office can help you analyze your specific rental market and provide accurate data on your investment property’s profitability and competitiveness. Contact us today to learn more.