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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 Winter Springs, understanding your net operating income (NOI) comprehensively is not only essential but empowering. This critical figure, used by property owners, banks, and lenders, enables you to gauge your property’s performance.

We’ll teach you the steps to determine your NOI and the factors that can influence this figure.

What is net operating income (NOI)?

Net operating income (NOI) represents the annual income of a single-family rental property after deducting operating expenses. This amount comprises rental income and additional income sources like laundry fees or parking fees. Mortgage payments or capital expenses, including repairs or renovations, are not included.

How to Calculate NOI

Various methods are available to calculate NOI, but the most frequent one involves subtracting operating expenses from a 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

Take note of a few things 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.

Next, include only operating expenses. This encompasses property taxes, insurance, and repairs. It does not include mortgage payments or capital expenses, such as renovations.

Factors that can affect your NOI

Your NOI can be affected by various factors. While some of these factors are controllable, 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: Yearly variations in operating expenses are common. If you manage to reduce these costs, your NOI will rise.
  • Interest rates: If your rental property has a mortgage, fluctuations in interest rates can affect your NOI. An increase in interest rates raises mortgage payments, thus decreasing your NOI.
  • Vacancy rates: Rising vacancy rates result in decreased rental income and subsequently lower NOI.

Evidently, several factors can impact your NOI. However, keep in mind that many of these factors are controllable. By keeping track and making adjustments, you can sustain a healthy NOI and secure your property’s profitability.

How to use NOI to make savvy real estate decisions

Now that you understand how to calculate NOI, you can use this information to make educated real estate decisions. Whether you’re considering buying a property or comparing investment opportunities, NOI is a powerful asset in your decision-making toolkit.

Below are a few examples of how NOI can be applied in practice:

  1. You’re considering buying a rental property for $200,000, which has an NOI of $20,000. This property earns an NOI of $20,000. This translates to a return on investment (ROI) of $20,000/$200,000, or 10%. This favorable ROI leads you to purchase the property.
  2. 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. You find another property that generates 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 are contemplating purchasing a rental property priced at $100,000. The NOI of this property is $15,000. You discover another property also priced at $100,000. Yet, this property has an NOI of $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 Winter Springs and nearby. If calculating values like NOI or ROI isn’t your forte, don’t worry; the experts at Real Property Management Verita are here to assist. Our local office can supply you with precise data on your investment property’s profitability and competitiveness, tailored to your rental market. Get in touch with us today to learn more.

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