As a Weston rental property owner, thoroughly understanding your net operating income (NOI) is both essential and empowering. This number, an essential metric for property owners, banks, and lenders, lets you evaluate 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. It comprises rental income along with other income types, such as laundry and parking fees. Mortgage payments or capital expenses, including repairs or renovations, are not included.
How to Calculate NOI
Various methods are available to calculate NOI, but the most frequent one involves 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
Take note of a few things when calculating your NOI. Initially, ensure you include all sources of income. 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 encompasses property taxes, insurance, and repairs. Mortgage payments and capital expenses, such as renovations, are not included.
Factors that can affect your NOI
Your NOI can be affected by various factors. While some of these factors are controllable, others are not.
- Rental income: The rental income you produce will directly influence your NOI. 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 control these costs, your NOI will grow.
- Interest rates: If your rental property has a mortgage, fluctuations in interest rates can affect your NOI. Higher interest rates will raise your mortgage payments, thereby decreasing your NOI.
- Vacancy rates: Higher vacancy rates will reduce rental income and thus lower your NOI.
Evidently, several factors can impact your NOI. Nonetheless, it’s important to note that many of these factors can be controlled. 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 considering buying a property or comparing investment opportunities, NOI is a powerful asset in your decision-making toolkit.
Below are a few examples of how NOI can be applied in practice:
- You’re considering buying a rental property for $200,000, which has an NOI of $20,000. The NOI for this property is $20,000. This provides a return on investment (ROI) of $20,000/$200,000, or 10%. This favorable ROI leads you to purchase the property.
- You possess a rental property with 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 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 NOI of this property is $15,000. You discover another property also priced at $100,000. Yet, this property 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?
By learning to calculate NOI, you can make savvy real estate decisions and ensure your rental property performs well in Weston and nearby. If calculating values like NOI or ROI isn’t your forte, don’t worry; the experts at Real Property Management of Soflo are here to assist. 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 today to learn more.
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