As a East Greenbush rental property owner, thoroughly understanding your net operating income (NOI) is both essential and empowering. This important metric, relied on by property owners, banks, and lenders, allows you to measure your property’s performance.
We’ll show you how to calculate your NOI and educate you on the factors that can affect it.
What is net operating income (NOI)?
The NOI, or net operating income, is the annual income of a single-family rental property after operating expenses are deducted. This total includes rental income and other income streams, such as laundry and parking fees. Mortgage payments and capital expenses, like repairs or renovations, are not part of this figure.
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
Keep several important aspects in mind when calculating your NOI. First, include every source of income. 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: Your NOI will be directly impacted by the rental income you generate. If you raise rent prices or lease to higher-paying tenants, your NOI will rise.
- Operating expenses: Operating expenses can change from year to year. By keeping these costs low, you can boost your NOI.
- Interest rates: Having a mortgage on your rental property means that changes in interest rates can affect your NOI. Higher interest rates will raise your mortgage payments, thereby decreasing your NOI.
- Vacancy rates: Increased vacancy rates decrease rental income, which in turn decreases NOI.
Clearly, various factors can impact your NOI. However, it’s key to remember that many of these factors are under your control. Through 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 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:
- You’re planning to buy a rental property for $200,000. It has an NOI of $20,000. The NOI for this property is $20,000. This equates to a return on investment (ROI) of $20,000/$200,000, or 10%. Given this good ROI, you decide to purchase the property.
- You have a rental property with 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.
- You’re planning to purchase a rental property for $100,000. The NOI of this property is $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?
By knowing how to calculate NOI, you can make wise real estate decisions and ensure your rental property performs well in East Greenbush and surrounding areas. If calculating values like NOI or ROI isn’t your forte, don’t worry; the experts at Real Property Management Teague are here to assist. Our local office provides accurate data on your investment property’s profitability and competitiveness, tailored to your specific market. Contact us now to learn more.
Originally Published on June 24, 2022
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