As a La Habra rental property owner, it’s essential to know and comprehend your net operating income (NOI). This figure is a key metric applied by property owners to determine a property’s performance and is also used by banks and other lenders. This guide will walk you through the steps vital to calculating your NOI. We’ll also discuss some of the factors that can affect this number.
What is net operating income (NOI)?
Net operating income (NOI) is a single-family rental property’s annual income after deducting operating expenses. This figure includes both rental income and other forms of income, such as laundry fees or parking fees. It does not include mortgage payments or capital expenses (such as repairs or renovations).
How to Calculate NOI
There are many different means to calculate NOI, but commonly, the most general method is to take a property’s total income 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
There are some things to take into consideration when calculating your NOI. First, make certain to include all sources of income. This means rental income from tenants and any other fees or charges you collect (such as pet fees or parking fees). Second, ensure only to include operating expenses. This encompasses things, like in particular, property taxes, insurance, and repairs. Mortgage payments and capital expenses (such as renovations) are not included in this number.
Factors that can affect your NOI
Quite a lot of factors can affect your NOI. Several of these are within your control, while others are not.
- Rental income: The amount of rental income you generate will promptly change your NOI. If you can increase rent prices or lease to higher-paying tenants, your NOI will increase.
- Operating expenses: Your operating expenses can deviate from year to year. If you can keep these costs down, your NOI will increase.
- Interest rates: If you have a mortgage on your rental property, adjustments in interest rates can affect your NOI. A rise in interest rates will increase your mortgage payments, which will, in turn, decrease your NOI.
- Vacancy rates: A growth in vacancy rates will bring down rental income and, therefore, decrease NOI.
As very clearly seen, quite a lot of aspects can affect your NOI. It’s significant to keep an eye on these factors and adjust as desired.
How to use NOI to make smart real estate decisions
Now that you perceive how to calculate NOI, you can put to use this information to come to ideal real estate judgments and decisions. If you’re seriously considering getting a rental property, you can use the NOI to determine whether the property is the best investment. You can as well make use of it to compare different properties and determine which one will generate the highest return on investment.
Here are a few examples of how NOI can be used in practice:
You’re thinking of obtaining a rental property for $200,000. The property has an NOI of $20,000. This means the property will bring about a return on investment (ROI) of $20,000/$200,000, or 10%. This is a great ROI, so you prefer to have this property.
You own a rental property with an NOI of $15,000. You’re taking into account selling the property and putting to use the earnings to procure a different property. However, you find another property that has an NOI of $30,000. This property will produce a higher return on investment, so you decide to sell your current property and purchase the new one.
You’re looking into obtaining a rental property for $100,000. The property has an NOI of $15,000. You look for another property that’s also for sale for $100,000. But, this property has an NOI of $25,000. The second property will generate a higher return on investment, so you finally decide on acquiring it instead.
What’s the bottom line?
NOI is a useful metric for any La Habra property manager. By realizing how to calculate NOI, you can take advantage of it to make the best real estate decisions and be certain that your rental property is performing as well as it should be. However, if calculating values like NOI or ROI isn’t your strong suit, check into having the professionals at Real Property Management Caliber do it for you. Our local office can support you to analyze your specific rental market and convey accurate data on your investment property’s profitability and competitiveness. Contact us today to learn more.
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