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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.For a Richmond Heights rental property owner, a deep understanding of your net operating income (NOI) is crucial 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). This total includes rental income and other income streams, such as laundry and parking fees. This figure excludes mortgage payments and capital expenses, such as repairs or renovations.

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

Be mindful of a few critical elements 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.

Next, ensure only operating expenses are included. This involves property taxes, insurance, and repairs. Mortgage payments and capital expenses, such as renovations, are not included.

Factors that can affect your NOI

Multiple factors can affect your NOI. Some of these factors are within your control, while others are not.

  • Rental income: Your NOI will be directly impacted by the rental income you generate. If you can raise rent prices or lease to tenants who pay more, your NOI will go up.
  • Operating expenses: Operating costs can fluctuate annually. Keeping these expenses down will result in a higher NOI.
  • Interest rates: Having a mortgage on your rental property means that changes in interest rates can affect your NOI. When interest rates rise, your mortgage payments increase, leading to a lower NOI.
  • Vacancy rates: Higher vacancy rates will reduce rental income and thus lower your NOI.

As shown, several elements can influence your NOI. It’s essential to remember that many factors affecting NOI are within 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

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

  1. You’re contemplating buying a rental property priced at $200,000 with an NOI of $20,000. This property has an NOI of $20,000. This indicates a return on investment (ROI) of $20,000/$200,000, which is 10%. Seeing this good ROI, you choose to buy 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. You discover another property with an NOI of $30,000. This property offers a higher return on investment, prompting you to sell your current property and purchase the new one.
  3. You’re considering buying a rental property for $100,000. The property generates an NOI of $15,000. You find another property available for $100,000. However, this property generates an NOI of $25,000. Since the second property has a higher return on investment, you choose to buy it instead.

What’s the bottom line?

By learning to calculate NOI, you can make savvy real estate decisions and ensure your rental property performs well in Richmond Heights and nearby. Should you find calculating values like NOI or ROI difficult, know that the professionals at Real Real Property Management Endeavor are here to help. Our local office offers accurate data on your investment property’s profitability and competitiveness, customized to your specific rental market. Contact us today for more information.

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