Skip to Content

The Essential Guide to Calculating Net Operating Income

Kent Real Estate Investor Calculating NOIAs a Kent rental property owner, it’s significant to know 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 some different methods to calculate NOI, nevertheless, the most frequent 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 certain things to bear in mind when calculating your NOI. First, ensure 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). Second, make certain only to include operating expenses. This covers things namely property taxes, insurance, and repairs. Mortgage payments and capital expenses (such as renovations) are not classified in this number.

Factors that can affect your NOI

A lot of aspects can affect your NOI. A lot of these are within your control, while others are not.

  • Rental income: The amount of rental income you generate will quickly affect your NOI. If you can increase rent prices or lease to higher-paying tenants, your NOI will increase.
  • Operating expenses: Your operating expenses can differ 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, shifts in interest rates can affect your NOI. An increase in interest rates will multiply your mortgage payments, which will, in turn, decrease your NOI.
  • Vacancy rates: A raise in vacancy rates will lessen rental income and, therefore, decrease NOI.

As shown, various characteristics can affect your NOI. It’s essential to keep an eye on these factors and adjust as required.

How to use NOI to make smart real estate decisions

Now that you recognize how to calculate NOI, you can make use of this information to form the best real estate choices. If you’re thinking of obtaining a rental property, you can use the NOI to aid identify whether the property is a great investment. You can likewise put it to use to compare different properties and detect which one will generate the highest return on investment.

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

Let’s say you’re seriously looking into owning a rental property for $200,000. The property has an NOI of $20,000. This means the property will produce a return on investment (ROI) of $20,000/$200,000, or 10%. This is indeed a good ROI, so you decide to acquire the property.

You own a rental property with an NOI of $15,000. You’re looking into selling the property and making use of the income to obtain a different property. However, you find another property that has an NOI of $30,000. This property will bring about a higher return on investment, so you prefer to sell your current property and purchase the new one.

You’re taking into account procuring a rental property for $100,000. The property has an NOI of $15,000. You discover another property that’s also for sale for $100,000. Though, this property has an NOI of $25,000. The second property will generate a higher return on investment, so you consider buying it instead.

What’s the bottom line?

NOI is a significant metric for any Kent property manager. By perceiving how to calculate NOI, you can utilize it to make ideal real estate decisions and make it a point 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, think of having the professionals at Real Property Management Excelled do it for you. Our local office can aid you to analyze your specific rental market and provide accurate data on your investment property’s profitability and competitiveness. Contact us today to learn more.

We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.

The Neighborly Done Right Promise

The Neighborly Done Right Promise ® delivered by Real Property Management, a proud Neighborly company

When it comes to finding the right property manager for your investment property, you want to know that they stand behind their work and get the job done right – the first time. At Real Property Management we have the expertise, technology, and systems to manage your property the right way. We work hard to optimize your return on investment while preserving your asset and giving you peace of mind. Our highly trained and skilled team works hard so you can be sure your property's management will be Done Right.

Canada excluded. Services performed by independently owned and operated franchises.

See Full Details