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The Essential Guide to Calculating Net Operating Income

Oyster Bay Real Estate Investor Calculating NOIAs an Oyster Bay rental property owner, you should be aware of your net operating income (NOI). This figure is a key metric utilized by property owners to determine a property’s performance and is also used by banks and other lenders. This guide will walk you through the steps necessary to calculate your NOI. We’ll also discuss some of the factors that can affect this number.

What is net operating income (NOI)?

Net operating income (NOI) is a single-family rental property’s annual income after deducting operating expenses. This figure includes both rental income and other forms of income, such as laundry fees or parking fees. It does not include mortgage payments or capital expenses (such as repairs or renovations).

How to Calculate NOI

There are a few different ways to calculate NOI, but the most common method is to take a property’s total income 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

There are a couple of factors to consider when calculating your NOI. Firstly, remember to include all sources of income. This means rental income from tenants and any other fees or charges you collect (such as pet fees or parking fees). Secondly, be certain just to include operating expenses. This involves items like property taxes, insurance, and repairs. Mortgage payments and capital expenses (such as renovations) are not included in this number.

Factors that can affect your NOI

Many variables can affect your NOI. A portion of these is within your control, while others are not.

  • Rental income: The amount of rental income you generate will straightforwardly influence your NOI. If you can increase rent prices or lease to higher-paying tenants, your NOI will increase.
  • Operating expenses: Your operating expenses might change from year to year. If you can keep these costs down, your NOI will increase.
  • Interest rates: If you have a mortgage on your rental property, changes in interest rates can affect your NOI. A rise in interest rates will upsurge your mortgage payments, which will, in turn, decrease your NOI.
  • Vacancy rates: A growth in vacancy rates will diminish rental income and, therefore, decrease NOI.

As may be obvious, a couple of factors can affect your NOI. You should keep an eye on these factors and adjust depending on the situation.

How to use NOI to make smart real estate decisions

Since it is now so obvious how to calculate NOI, you can utilize this information to make savvy real estate decisions. If you’re considering owning a rental property, you can use the NOI to help decide whether the property is a smart investment. You can also use it to compare different properties and check which one will generate the highest return on investment.

Here are a few examples of how NOI can be used in practice:

You’re considering getting a rental property for $200,000. The property has an NOI of $20,000. This means the property will earn a return on investment (ROI) of $20,000/$200,000, or 10%. This is an excellent ROI, so you decide to acquire the property.

You own a rental property with an NOI of $15,000. You’re considering selling the property and using the proceeds to purchase a different property. However, you find another property that has an NOI of $30,000. This property will generate a higher return on investment, so you decide to sell your current property and purchase the new one.

You’re considering purchasing a rental property for $100,000. The property has an NOI of $15,000. You find another property that’s also for sale for $100,000. However, this property has an NOI of $25,000. The second property will generate a higher return on investment, so you decide to purchase it instead.

What’s the bottom line?

NOI is a significant metric for any Oyster Bay property manager. By learning how to calculate NOI, you can utilize it to make wise real estate decisions and guarantee that your rental property is performing as well as it should be. However, if calculating values like NOI or ROI isn’t your strong suit, try having the professionals at Real Property Management Unlimited do it for you. Our local office can help you analyze your specific rental market and give accurate data on your investment property’s profitability and competitiveness. Contact us today to learn more.

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