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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 rental property owner in Sandy Springs, understanding your net operating income (NOI) comprehensively is not only essential but empowering. This metric, crucial for property owners, banks, and lenders, helps you assess your property’s performance.

We’ll show you how to calculate your NOI and educate you on the factors that can affect it.

What is net operating income (NOI)?

The annual income of a single-family rental property, after deducting operating expenses, is known as net operating income (NOI). This figure encompasses rental income as well as other income sources, such as laundry and parking fees. Mortgage payments and capital expenses (e.g., repairs or renovations) are not included.

How to Calculate NOI

Different methods can be used to calculate NOI, but the most common is to take the total income of the property and subtract its operating expenses. Here’s an example:

  • Total income: $30,000
  • (subtract) Operating Expenses: $15,000
  • (equals) NOI: $30,000 – $15,000 = $15,000

Consider a few key points when calculating your NOI. To start, be sure to include all income sources. This covers rental income and other fees or charges you collect, including pet fees or parking fees.

Secondly, only include operating expenses. This involves 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

Various factors can influence your NOI. Some of these factors are within your control, while others are not.

  • Rental income: The rental income you produce will directly influence your NOI. If you raise rent prices or lease to higher-paying tenants, your NOI will rise.
  • Operating expenses: Operating costs can fluctuate annually. Lowering these expenses will increase your NOI.
  • Interest rates: Changes in interest rates can impact your NOI if you have a mortgage on your rental property. An increase in interest rates raises mortgage payments, thus decreasing your NOI.
  • Vacancy rates: Increased vacancy rates decrease rental income, which in turn decreases NOI.

Clearly, various factors can impact your NOI. It’s essential to remember that many factors affecting NOI are within your control. Monitoring and adjusting as necessary can help you maintain a healthy NOI and ensure your property remains profitable.

How to use NOI to make savvy real estate decisions

With your newfound knowledge of calculating NOI, you can use this information to make well-informed real estate decisions. Whether you’re evaluating a property purchase or comparing various investments, NOI can be a crucial tool in your decision-making arsenal.

Below are a few examples of how NOI can be applied in practice:

  1. You’re thinking about buying a rental property for $200,000. It has an NOI of $20,000. The property generates an NOI of $20,000. This translates to a return on investment (ROI) of $20,000/$200,000, or 10%. This ROI is favorable, so you choose to purchase the property.
  2. Your current rental property has an NOI of $15,000. You’re thinking about selling the property and using the proceeds to buy a new one. Instead, you find another property with an NOI of $30,000. This property offers a higher return on investment, prompting you to sell your current property and purchase the new one.
  3. You’re planning to purchase a rental property for $100,000. This property has an NOI of $15,000. You locate another property also for sale for $100,000. However, this property generates 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 knowing how to calculate NOI, you can make wise real estate decisions and ensure your rental property performs well in Sandy Springs and surrounding areas. If you find calculating NOI or ROI challenging, the professionals at Real Real Property Management Piedmont are available to help. Our local office offers accurate data on your investment property’s profitability and competitiveness, customized to your specific rental market. Reach out to us today to find out more.


Originally Published on June 24, 2022

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