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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.Being a rental property owner in Crown Point, gaining a thorough understanding of your net operating income (NOI) is both vital and empowering. This number, an essential metric for property owners, banks, and lenders, lets you evaluate your property’s performance.

We’ll walk you through calculating your NOI and explain the factors that can impact this number.

What is net operating income (NOI)?

Net operating income (NOI) is the yearly income of a single-family rental property minus operating expenses. It comprises rental income along with other income types, such as laundry and parking fees. This excludes mortgage payments and capital expenses, such as repairs or renovations.

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

Remember a few important factors when calculating your NOI. First, make sure to account for all income sources. This includes tenant rental income and any other fees or charges you collect, like pet fees or parking fees.

Secondly, be sure to include only operating expenses. This covers property taxes, insurance, and repairs. This total does not account for mortgage payments or capital expenses, such as renovations.

Factors that can affect your NOI

Several elements can impact your NOI. Some factors you can control, while others you cannot.

  • Rental income: The rental income you produce will directly influence 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 control these costs, your NOI will grow.
  • Interest rates: Interest rate changes can affect your NOI if your rental property is mortgaged. Rising interest rates will lead to higher mortgage payments and a decrease in your NOI.
  • Vacancy rates: An increase in vacancy rates reduces rental income, thereby decreasing NOI.

As you can observe, multiple factors influence your NOI. Yet, it’s crucial to remember that many factors are within your control. By observing and tweaking as required, you can keep a healthy NOI and guarantee your property’s profitability.

How to use NOI to make savvy real estate decisions

Knowing how to calculate NOI allows you to leverage this knowledge for making informed real estate decisions. NOI can be a powerful tool when deciding on property purchases or comparing investment opportunities.

Here are some practical examples of how to use NOI:

  1. You’re planning to buy a rental property for $200,000. It has an NOI of $20,000. The property generates an NOI of $20,000. This results in a return on investment (ROI) of $20,000/$200,000, or 10%. With this favorable ROI, you decide to buy the property.
  2. Your rental property has an NOI of $15,000. You are considering selling the property and investing the proceeds in another property. However, you locate another property with an NOI of $30,000. This property provides a higher return on investment, so you opt to sell your current property and acquire the new one.
  3. You’re planning to purchase a rental property for $100,000. This property has an NOI of $15,000. You come across another property for sale at $100,000. Meanwhile, this property has an NOI of $25,000. The second property offers a higher return on investment, leading you to purchase it 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 Crown Point and its vicinity. If you’re not comfortable calculating NOI or ROI, the experts at Real Property Management NW Indiana are here to assist you. Our local office provides accurate data on your investment property’s profitability and competitiveness, tailored to your specific market. Get in touch today to learn more.

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