As a Kent 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 show you how to calculate your NOI and educate you on the factors that can affect it.
What is net operating income (NOI)?
The NOI, or net operating income, is the annual income of a single-family rental property after operating expenses are deducted. It includes rental income and other forms of income like laundry and parking fees. Mortgage payments and capital expenses, like repairs or renovations, are not part of this figure.
How to Calculate NOI
There are multiple ways to calculate NOI, with the most common being 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
Keep several important aspects in mind when calculating your NOI. First, make sure to account for all income sources. This encompasses rental income from tenants as well as any additional fees or charges, like pet fees or parking fees.
Secondly, be sure to include only operating expenses. This consists of property taxes, insurance, and repairs. Mortgage payments and capital expenses, such as renovations, are not included.
Factors that can affect your NOI
Several elements can impact your NOI. Certain factors are under your control, whereas others are not.
- Rental income: Your NOI is directly influenced by the rental income you generate. Higher rent prices or leasing to tenants who pay more will result in a higher NOI.
- Operating expenses: Yearly variations in operating expenses are common. If you control these costs, your NOI will grow.
- Interest rates: Having a mortgage on your rental property means that changes in interest rates can affect your NOI. Higher interest rates will raise your mortgage payments, thereby decreasing your NOI.
- Vacancy rates: Increased vacancy rates decrease rental income, which in turn decreases NOI.
As shown, several elements can influence your NOI. However, it’s key to remember that many of these factors are under your control. By regularly 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
Now that you understand how to calculate NOI, you can use this information to make educated real estate decisions. NOI can be a powerful tool when deciding on property purchases or comparing investment opportunities.
Here are a few practical examples of using NOI:
- You’re planning to buy a rental property for $200,000. It has an NOI of $20,000. This property has an NOI of $20,000. This translates to a return on investment (ROI) of $20,000/$200,000, or 10%. Given this good ROI, you decide to purchase the property.
- Your rental property has an NOI of $15,000. You are contemplating selling the property and using the proceeds to purchase another property. However, you locate another property with an NOI of $30,000. Since this property will generate a higher return on investment, you decide to sell your current property and buy the new one.
- You’re considering buying a rental property for $100,000. This property earns an NOI of $15,000. You come across another property for sale at $100,000. However, the NOI of this property is $25,000. The second property provides a higher return on investment, so you decide to buy it instead.
What’s the bottom line?
Knowing how to calculate NOI enables you to make intelligent real estate decisions and ensures your rental property performs well in Kent and nearby. Should you find calculating values like NOI or ROI difficult, know that the professionals at Real Real Property Management Excelled are here to help. Our local office can supply you with precise data on your investment property’s profitability and competitiveness, tailored to your rental market. Get in touch today to learn more.
Originally Published on June 24, 2022
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