For a Ringgold rental property owner, a deep understanding of your net operating income (NOI) is crucial and empowering. This important metric, relied on by property owners, banks, and lenders, allows you to measure your property’s performance.
We’ll guide you through the steps to calculate your NOI and help you understand the factors that influence 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. This total includes rental income and other income streams, such as laundry and parking fees. Mortgage payments or capital expenses, including repairs or renovations, are not included.
How to Calculate NOI
Several methods exist to calculate NOI, but the most common is to subtract operating expenses from the 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. Firstly, ensure all sources of income are included. This includes rental income from tenants and other fees or charges, such as pet fees or parking fees.
Secondly, be sure to include only operating expenses. This encompasses property taxes, insurance, and repairs. Mortgage payments and capital expenses, such as renovations, are not included.
Factors that can affect your NOI
Multiple factors can affect your NOI. Certain factors are under your control, whereas others are not.
- Rental income: The rental income you earn directly affects your NOI. By increasing rent prices or leasing to higher-paying tenants, you can boost your NOI.
- Operating expenses: Operating expenses can change from year to year. If you manage to reduce these costs, your NOI will rise.
- Interest rates: If your rental property is mortgaged, variations in interest rates can impact your NOI. When interest rates rise, your mortgage payments increase, leading to a lower NOI.
- Vacancy rates: Higher vacancy rates will reduce rental income and thus lower your NOI.
As shown, several elements can influence your NOI. Nonetheless, it’s important to note that many of these factors can be controlled. Through 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 considering a property purchase or comparing investment opportunities, NOI is a valuable tool in your decision-making toolkit.
Here are several practical examples of using NOI:
- You’re considering buying a rental property for $200,000, which has an NOI of $20,000. This property has an NOI of $20,000. This provides a return on investment (ROI) of $20,000/$200,000, or 10%. Given this good ROI, you decide to purchase the property.
- You currently own a rental property with an NOI of $15,000. You are thinking about selling this property and using the proceeds to buy another one. However, you locate another property with an NOI of $30,000. This property will yield a higher return on investment, leading you to sell your current property and buy the new one.
- You’re considering buying a rental property for $100,000. The property generates an NOI of $15,000. You find another property available for $100,000. However, the NOI of this property is $25,000. With a higher return on investment, you decide to buy the second property instead.
What’s the bottom line?
Understanding how to calculate NOI allows you to make smart real estate decisions and ensure your rental property performs effectively in Ringgold and its vicinity. Should you find calculating values like NOI or ROI difficult, know that the professionals at Real Real Property Management Ascension are here to help. Our local office provides accurate data on your investment property’s profitability and competitiveness, tailored to your specific market. Get in touch with us today to learn more.
Originally Published on June 24, 2022
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