As a Hillsboro rental property owner, thoroughly understanding your net operating income (NOI) is both essential and empowering. This figure, vital for property owners, banks, and lenders, provides a means to assess 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)?
The NOI, or net operating income, is the annual income of a single-family rental property after operating expenses are deducted. 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
While there are various methods to calculate NOI, the most typical approach 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
Take note of a few things when calculating your NOI. First, include every source of income. This encompasses rental income from tenants as well as any additional fees or charges, like pet fees or parking fees.
Next, ensure only operating expenses are included. This covers property taxes, insurance, and repairs. It does not include mortgage payments or capital expenses, such as renovations.
Factors that can affect your NOI
Numerous factors can influence your NOI. Some factors you can control, while others you cannot.
- Rental income: Your NOI is directly influenced by the rental income you generate. Higher rent prices or leasing to tenants who pay more will result in a higher NOI.
- Operating expenses: The operating expenses can differ each 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. Higher interest rates will raise your mortgage payments, thereby decreasing your NOI.
- Vacancy rates: An increase in vacancy rates reduces rental income, thereby decreasing NOI.
As you can observe, multiple factors influence your NOI. However, it’s key to remember that many of these factors are under 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
Now that you understand how to calculate NOI, you can use this information to make educated real estate decisions. Whether you’re thinking about buying a property or evaluating different investments, NOI is a powerful tool in your decision-making process.
Here are some practical examples of how to use NOI:
- You’re looking at purchasing a rental property for $200,000. It has an NOI of $20,000. This property earns an NOI of $20,000. This results in a return on investment (ROI) of $20,000/$200,000, or 10%. This favorable ROI leads you to purchase the property.
- You have a rental property with an NOI of $15,000. You are contemplating selling the property and using the proceeds to purchase another property. You discover 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.
- You are contemplating purchasing a rental property priced at $100,000. The property provides an NOI of $15,000. You find another property also listed for $100,000. Meanwhile, this property has an NOI of $25,000. Since the second property has a higher return on investment, you choose to buy it instead.
What’s the bottom line?
Knowing how to calculate NOI enables you to make intelligent real estate decisions and ensures your rental property performs well in Hillsboro and nearby. If you’re not comfortable calculating NOI or ROI, the experts at Real Property Management Solutions are here to assist you. We can provide accurate data on your investment property’s profitability and competitiveness, tailored to your specific rental market, through our local office. Get in touch today to learn more.
Originally Published on June 24, 2022
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.
