For a Newport News 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 walk you through calculating your NOI and explain the factors that can impact this number.
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. Mortgage payments and capital expenses (e.g., repairs or renovations) are not included.
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
Take note of a few things when calculating your NOI. First, make sure to account for all income sources. This includes tenant rental income and any other fees or charges you collect, like pet fees or parking fees.
Secondly, only include operating expenses. This encompasses property taxes, insurance, and repairs. Mortgage payments and capital expenses (e.g., renovations) are excluded from this number.
Factors that can affect your NOI
Several elements can impact your NOI. Some of these factors are within your control, while others are not.
- Rental income: Your NOI is directly influenced 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. If you manage to reduce these costs, your NOI will rise.
- Interest rates: Changes in interest rates can impact your NOI if you have a mortgage on your rental property. When interest rates rise, your mortgage payments increase, leading to a lower NOI.
- Vacancy rates: An increase in vacancy rates reduces rental income, thereby decreasing NOI.
As you can observe, multiple factors influence 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 provides a return on investment (ROI) of $20,000/$200,000, or 10%. This favorable ROI leads you to purchase the property.
- Your rental property has an NOI of $15,000. You are considering selling the property and investing the proceeds in another property. Instead, you find another property with 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’re thinking of purchasing a rental property for $100,000. This property has an NOI of $15,000. You come across another property for sale at $100,000. However, this property generates an NOI of $25,000. With a higher return on investment, you decide to buy the second property 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 Newport News and nearby. If you find calculating NOI or ROI challenging, the professionals at Real Real Property Management Complete are available to help. Our local office offers accurate data on your investment property’s profitability and competitiveness, customized to your specific rental market. Get in touch with us today to learn more.
Originally Published on June 24, 2022
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