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The Essential Guide to Calculating Net Operating Income

A woman sitting at a desk, working on a laptop and surrounded by papers.As a Ludlow rental property owner, fully grasping your net operating income (NOI) is essential and empowering. This metric, crucial for property owners, banks, and lenders, helps you 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 net operating income (NOI) is the annual revenue of a single-family rental property after subtracting operating expenses. It includes rental income and other forms of income like laundry and 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. Firstly, ensure all sources of income are included. This covers rental income and other fees or charges you collect, including pet fees or parking fees.

Secondly, only include operating expenses. This consists of property taxes, insurance, and repairs. Mortgage payments and capital expenses (e.g., renovations) are excluded from this number.

Factors that can affect your NOI

Numerous factors can influence your NOI. Certain factors are under your control, whereas others are not.

  • Rental income: The amount of rental income you generate has a direct impact on your NOI. If you raise rent prices or lease to higher-paying tenants, your NOI will rise.
  • Operating expenses: Operating expenses may vary each year. By keeping these costs low, you can boost your 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: Increased vacancy rates decrease rental income, which in turn decreases NOI.

Clearly, various factors can impact your NOI. Nonetheless, it’s important to note that many of these factors can be controlled. 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

Having learned how to calculate NOI, you can now apply this information to make informed 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 practical examples of using NOI:

  1. You’re looking at purchasing a rental property for $200,000. It has an NOI of $20,000. The NOI for this property is $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.
  2. You currently own a rental property with an NOI of $15,000. You’re thinking about selling the property and using the proceeds to buy a new one. Instead, you find 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.
  3. You’re thinking of purchasing a rental property for $100,000. The property provides an NOI of $15,000. You find another property also listed for $100,000. However, the NOI of this property is $25,000. Given the higher return on investment, you opt to purchase the second property instead.

What’s the bottom line?

By knowing how to calculate NOI, you can make wise real estate decisions and ensure your rental property performs well in Ludlow and surrounding areas. If calculating NOI or ROI is not your strength, rest assured the professionals at Real Property Management Bay State West are here 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 now to learn more.

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