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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 Davenport 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 will explain how to calculate your NOI and inform you about the factors that can impact 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 figure encompasses rental income as well as other income sources, 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

While there are various methods to calculate NOI, the most typical approach 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. Initially, ensure you include all sources of income. This includes rental income from tenants and other fees or charges, such as pet fees or parking fees.

Second, make sure to include only operating expenses. This includes expenses such as property taxes, insurance, and repairs. This figure excludes mortgage payments and capital expenses, like renovations.

Factors that can affect your NOI

Various factors can influence your NOI. You can control some of these factors, but others are beyond your control.

  • Rental income: Your NOI is directly influenced by the rental income you generate. Increasing rent prices or leasing to higher-paying tenants will raise your NOI.
  • Operating expenses: The operating expenses can differ each year. Lowering these expenses will increase your NOI.
  • Interest rates: Changes in interest rates can impact your NOI if you have a mortgage on your rental property. Higher interest rates will raise your mortgage payments, thereby decreasing your NOI.
  • Vacancy rates: When vacancy rates rise, rental income falls, leading to a lower NOI.

As demonstrated, numerous factors can affect your NOI. However, it’s key to remember that many of these factors are under your control. Monitoring and adjusting as necessary can help you maintain a healthy NOI and ensure your property remains profitable.

How to use NOI to make savvy real estate decisions

Equipped with the knowledge of calculating NOI, you can now use this information to make smart real estate decisions. Whether you’re thinking about buying a property or evaluating different investments, NOI is a powerful tool in your decision-making process.

Here are a few ways to use NOI in practice:

  1. You’re thinking about buying a rental property for $200,000. It has an NOI of $20,000. The NOI for the property is $20,000. This provides a return on investment (ROI) of $20,000/$200,000, or 10%. Given this good ROI, you decide to purchase the property.
  2. You possess a rental property with an NOI of $15,000. You are thinking about selling this property and using the proceeds to buy another one. However, you come across another property that has an NOI of $30,000. With a higher return on investment, you choose to sell your current property and buy the new one.
  3. You are thinking about buying a rental property for $100,000. This property earns an NOI of $15,000. You locate another property also for sale for $100,000. This property, however, has an NOI of $25,000. With a higher return on investment, you decide to buy the second property instead.

What’s the bottom line?

Understanding how to calculate NOI helps you make informed real estate decisions and ensures your rental property performs optimally in Davenport and nearby areas. If you find calculating NOI or ROI challenging, the professionals at Real Real Property Management Trusted Hands are available to help. We can provide accurate data on your investment property’s profitability and competitiveness, tailored to your specific rental market, through our local office. Reach out to us today to find out more.

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