What is net operating income (NOI)?
The annual income of a single-family rental property after operating expenses is known as net operating income (NOI). This number includes rental income and also other sources of income, such as laundry or parking fees. It would exclude mortgage payments as well as capital expenditures (such as repairs or renovations).
How to Calculate NOI.
There are several methods for calculating NOI, but the most common is to subtract a property’s total income from its operating expenses. Consider the following example:
Total Income: $30,000
(subtract) Operating Expenses: $15,000
(equals) NOI: $30,000 – $15,000 = $15,000
When calculating your NOI, there are a few factors to keep in mind. First, ensure that all sources of income are included. This includes rental income as well as any other fees or charges you receive (such as pet fees or parking fees). Second, only include operating expenses in your calculations. This includes property taxes, insurance, and maintenance. This number excludes mortgage payments and capital expenses (such as home improvements).
Factors that can affect your NOI.
Your NOI is affected by a combination of factors. Some of these factors are under your control, while others are not.
- Rental income: Your NOI is directly influenced by the amount of rental income you generate. Your NOI will rise if you can elevate rent prices or lease to higher-paying tenants.
- Operating expenses: Your operating expenses can fluctuate from one year to the next. Your NOI will increase if you can keep these costs down.
- Interest rates: Changes in interest rates can have an impact on your NOI if you have a mortgage on your rental property. A rise in interest rates will raise your mortgage payments, lowering your NOI.
- Vacancy rates: A rise in vacancy rates lowers rental income and, as a result, lowers NOI.
Several variables can impact your NOI, as demonstrated. It’s critical to monitor these variables and make adjustments as needed.
How to use net operating income (NOI) to make informed real estate decisions.
Now that you understand how to calculate NOI, you can use it to make informed real estate decisions. If you’re thinking about buying a rental property, the NOI can help you figure out if it’s a good investment. It can also be used to compare different properties and determine which one will provide the best return on investment.
Here are a few examples of how NOI can be put to use:
You plan on investing $200,000 in a rental property. The property has a $20,000 NOI. This means the property will yield a $20,000/$200,000 return on investment (ROI) of 10%. This is a good return on investment, so you end up purchasing the property.
You own a rental property with a $15,000 NOI. You’re planning on selling the house and using the proceeds to buy a new one. However, you come across another property with a $30,000 NOI. This property will generate a higher return of interest, so you decide to sell your current property and acquire the new one.
You’re thinking about investing $100,000 in a rental property. The NOI on the property is $15,000. You find an additional $100,000-priced property for sale. Yet this property has a $25,000 net operating income. You decide to buy the second property because it will yield a higher return on investment.
What’s the bottom line?
The net operating income (NOI) is a useful metric for many Helotes property managers. By understanding how to calculate NOI, you can ensure that your rental property is performing as it should and wise decisions are being made. However, if calculating values like NOI or ROI isn’t your strong suit, consider having the professionals at Real Property Management Hill Country do it for you. Our local office can help you analyze your specific rental market and give accurate data on your investment property’s profitability and competitiveness. Contact us today to learn more.