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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 Stuart rental property owner, thoroughly understanding your net operating income (NOI) is both essential and empowering. This figure, vital for property owners, banks, and lenders, provides a means to assess your property’s performance.

We’ll walk you through calculating your NOI and explain the factors that can impact this number.

What is net operating income (NOI)?

Net operating income (NOI) is the yearly income of a single-family rental property minus operating expenses. This total includes rental income and other income streams, such as laundry and parking fees. This excludes mortgage payments and capital expenses, such as repairs or renovations.

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. 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 covers property taxes, insurance, and repairs. This figure excludes mortgage payments and capital expenses, like renovations.

Factors that can affect your NOI

Multiple factors can affect your NOI. While some of these factors are controllable, others are not.

  • Rental income: The rental income you produce will directly influence your NOI. Increasing rent prices or leasing to higher-paying tenants will raise your NOI.
  • Operating expenses: Operating expenses may vary each year. Keeping these expenses down will result in a higher NOI.
  • Interest rates: If your rental property has a mortgage, fluctuations in interest rates can affect your NOI. Higher interest rates will raise your mortgage payments, thereby decreasing your NOI.
  • Vacancy rates: An increase in vacancy rates reduces rental income, thereby decreasing NOI.

Clearly, various factors can impact your NOI. Yet, it’s crucial to remember that many factors 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 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 practical examples of using NOI:

  1. You’re looking at purchasing 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 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 provides a higher return on investment, so you opt to sell your current property and acquire the new one.
  3. You are thinking about buying a rental property for $100,000. The NOI of this property is $15,000. You find another property available for $100,000. Yet, this property has an NOI of $25,000. Given the higher return on investment, you opt to purchase 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 Stuart and nearby areas. If calculating values like NOI or ROI isn’t your forte, don’t worry; the experts at Real Property Management Sailfish Coast are here to assist. Our local office can deliver 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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