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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 Round Rock rental property owner, fully grasping your net operating income (NOI) is essential and empowering. This number, an essential metric for property owners, banks, and lenders, lets you evaluate 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)?

The NOI, or net operating income, is the annual income of a single-family rental property after operating expenses are deducted. It includes rental income and other forms of income like laundry and parking fees. This figure 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. Firstly, ensure all sources of income are included. This includes tenant rental income and any other fees or charges you collect, like 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

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

  • Rental income: Your NOI will be directly impacted by the rental income you generate. If you can raise rent prices or lease to tenants who pay more, your NOI will go up.
  • Operating expenses: Yearly variations in operating expenses are common. If you manage to reduce these costs, your NOI will rise.
  • Interest rates: Having a mortgage on your rental property means that changes in interest rates can affect your NOI. Increased interest rates will result in higher mortgage payments, reducing your NOI.
  • Vacancy rates: When vacancy rates rise, rental income falls, leading to a lower NOI.

Evidently, several factors can impact your NOI. However, it’s key to remember that many of these factors are under your control. 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

Equipped with the knowledge of calculating NOI, you can now use this information to make smart real estate decisions. NOI can be a powerful tool when deciding on property purchases or comparing investment opportunities.

Here are a few ways to use NOI in practice:

  1. 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 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. You currently own a rental property with an NOI of $15,000. You are considering selling the property and investing the proceeds in another property. 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 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?

By learning to calculate NOI, you can make savvy real estate decisions and ensure your rental property performs well in Round Rock and nearby. Should you find calculating values like NOI or ROI difficult, know that the professionals at Real Real Property Management Capital City 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. Get in touch with us today to learn more.

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