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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 rental property owner in Arlington, understanding your net operating income (NOI) comprehensively is not only essential but empowering. This metric, crucial for property owners, banks, and lenders, helps you assess 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) represents the annual income of a single-family rental property after deducting operating expenses. This amount comprises rental income and additional income sources like laundry fees or parking fees. Mortgage payments or capital expenses, including 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

Be mindful of a few critical elements when calculating your NOI. To start, be sure to include all income sources. This includes rental income from tenants and other fees or charges, such as pet fees or parking fees.

Next, ensure only operating expenses are included. This includes expenses such as property taxes, insurance, and repairs. It does not include mortgage payments or capital expenses, such as renovations.

Factors that can affect your NOI

Multiple factors can affect your NOI. You can control some of these factors, but others are beyond your control.

  • Rental income: The rental income you earn directly affects your NOI. Increasing rent prices or leasing to higher-paying tenants will raise your NOI.
  • Operating expenses: Yearly variations in operating expenses are common. Lowering these expenses will increase your NOI.
  • Interest rates: Interest rate changes can affect your NOI if your rental property is mortgaged. An increase in interest rates raises mortgage payments, thus decreasing your NOI.
  • Vacancy rates: When vacancy rates rise, rental income falls, leading to a lower NOI.

As shown, several elements can influence your NOI. However, keep in mind that many of these factors are controllable. 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

With your newfound knowledge of calculating NOI, you can use this information to make well-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 ways to use NOI in practice:

  1. You’re looking at purchasing a rental property for $200,000. It has an NOI of $20,000. The NOI for the property is $20,000. This indicates a return on investment (ROI) of $20,000/$200,000, which is 10%. Seeing this good ROI, you choose to buy the property.
  2. Your current rental property has an NOI of $15,000. You are thinking about selling this property and using the proceeds to buy another one. You discover another property with an NOI of $30,000. With a higher return on investment, you choose to sell your current property and buy the new one.
  3. You are contemplating purchasing a rental property priced at $100,000. The property provides an NOI of $15,000. You find another property available 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?

Understanding how to calculate NOI helps you make informed real estate decisions and ensures your rental property performs optimally in Arlington and nearby areas. If calculating NOI or ROI is not your strength, rest assured the professionals at Real Property Management MidTown 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. Reach out to us today to find out more.

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