As a Oyster Bay rental property owner, fully grasping your net operating income (NOI) is essential and empowering. This critical figure, used by property owners, banks, and lenders, enables you to gauge 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)?
Net operating income (NOI) is the yearly income of a single-family rental property minus operating expenses. This amount comprises rental income and additional income sources like laundry fees or parking fees. Mortgage payments and capital expenses (e.g., repairs or renovations) are not included.
How to Calculate NOI
Different methods can be used to calculate NOI, but the most common is to take the total income of the property and subtract its operating expenses. Here’s an example:
- Total income: $30,000
- (subtract) Operating Expenses: $15,000
- (equals) NOI: $30,000 – $15,000 = $15,000
Consider a few key points when calculating your NOI. Initially, ensure you include all sources of income. This means accounting for rental income and other collected fees or charges, such as pet fees or parking fees.
Second, make sure to include only operating expenses. This covers property taxes, insurance, and repairs. Mortgage payments and capital expenses (e.g., renovations) are excluded from this number.
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: The rental income you produce will directly influence your NOI. If you can raise rent prices or lease to tenants who pay more, your NOI will go up.
- Operating expenses: Operating expenses may vary each year. Keeping these expenses down will result in a higher NOI.
- Interest rates: If your rental property is mortgaged, variations in interest rates can impact your NOI. Increased interest rates will result in higher mortgage payments, reducing your NOI.
- Vacancy rates: When vacancy rates rise, rental income falls, leading to a lower NOI.
As you can observe, multiple factors influence your NOI. Yet, it’s crucial to remember that many factors are within your control. By keeping track and making adjustments, you can sustain a healthy NOI and secure your property’s profitability.
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 evaluating a property purchase or comparing various investments, NOI can be a crucial tool in your decision-making arsenal.
Here are a few ways to use NOI in practice:
- You’re thinking about buying a rental property for $200,000. It has an NOI of $20,000. This property earns an NOI of $20,000. This equates to a return on investment (ROI) of $20,000/$200,000, or 10%. This ROI is favorable, so you choose to purchase the property.
- You possess a rental property with an NOI of $15,000. You’re considering selling this property and using the funds to buy a different one. However, you come across another property that has 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.
- You’re thinking of purchasing a rental property for $100,000. This property has an NOI of $15,000. You locate another property also for sale for $100,000. This property, however, 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?
By learning to calculate NOI, you can make savvy real estate decisions and ensure your rental property performs well in Oyster Bay and nearby. If you find calculating NOI or ROI challenging, the professionals at Real Real Property Management Unlimited are available to help. 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.
Originally Published on June 24, 2022
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