For a Rye rental property owner, a deep understanding of your net operating income (NOI) is crucial and empowering. This number, an essential metric for property owners, banks, and lenders, lets you evaluate 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)?
The net operating income (NOI) is the annual revenue of a single-family rental property after subtracting operating expenses. It comprises rental income along with other income types, such as laundry and parking fees. This excludes mortgage payments and capital expenses, such as repairs or renovations.
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
Be mindful of a few critical elements when calculating your NOI. Firstly, ensure all sources of income are included. This includes rental income from tenants and other fees or charges, such as pet fees or parking fees.
Next, include only operating expenses. This encompasses property taxes, insurance, and repairs. This figure excludes mortgage payments and capital expenses, like 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. 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. Lowering these expenses will increase your NOI.
- Interest rates: If your rental property has a mortgage, fluctuations in interest rates can affect your NOI. When interest rates rise, your mortgage payments increase, leading to a lower NOI.
- Vacancy rates: Rising vacancy rates result in decreased rental income and subsequently lower NOI.
Evidently, several factors can impact your NOI. Nonetheless, it’s important to note that many of these factors can be controlled. By observing and tweaking as required, you can keep a healthy NOI and guarantee your property’s profitability.
How to use NOI to make savvy real estate decisions
Knowing how to calculate NOI allows you to leverage this knowledge for making informed 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:
- You’re considering buying a rental property for $200,000, which has an NOI of $20,000. The property generates an NOI of $20,000. This results in a return on investment (ROI) of $20,000/$200,000, or 10%. Seeing this good ROI, you choose to buy the property.
- You currently own a rental property with an NOI of $15,000. You are thinking about selling this property and using the proceeds to buy another 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.
- You are thinking about buying a rental property for $100,000. The property provides an NOI of $15,000. You discover another property also priced at $100,000. Yet, this property has an NOI of $25,000. The second property offers a higher return on investment, leading you to purchase 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 Rye and surrounding areas. If calculating NOI or ROI is not your strength, rest assured the professionals at Real Property Management Steel City are here to help. Our local office provides accurate data on your investment property’s profitability and competitiveness, tailored to your specific market. Reach out to us today to find out more.
Originally Published on June 24, 2022
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