Being a rental property owner in West Fargo, gaining a thorough understanding of your net operating income (NOI) is both vital and empowering. This critical figure, used by property owners, banks, and lenders, enables you to gauge 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 amount comprises rental income and additional income sources like laundry fees or parking fees. Mortgage payments and capital expenses, like repairs or renovations, are not part of this figure.
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
Be mindful of a few critical elements when calculating your NOI. First, make sure to account for all income sources. This includes rental income from tenants and other fees or charges, such as pet fees or parking fees.
Second, make sure to include only operating expenses. This consists of 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
Your NOI can be affected by various factors. Some of these factors are within your control, while others are not.
- Rental income: The rental income you earn directly affects your NOI. By increasing rent prices or leasing to higher-paying tenants, you can boost your NOI.
- Operating expenses: Operating costs can fluctuate annually. If you control these costs, your NOI will grow.
- Interest rates: Changes in interest rates can impact your NOI if you have a mortgage on your rental property. Rising interest rates will lead to higher mortgage payments and a decrease in your NOI.
- Vacancy rates: Increased vacancy rates decrease rental income, which in turn decreases NOI.
As shown, several elements can influence your NOI. It’s essential to remember that many factors affecting NOI are within your control. By keeping track and making adjustments, you can sustain a healthy NOI and secure 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 evaluating a property purchase or comparing various investments, NOI can be a crucial tool in your decision-making arsenal.
Here are several practical examples of using NOI:
- You’re thinking about buying a rental property for $200,000. It has an NOI of $20,000. This property earns an NOI of $20,000. This indicates a return on investment (ROI) of $20,000/$200,000, which is 10%. Seeing this good ROI, you choose to buy the property.
- Your rental property has an NOI of $15,000. You are thinking about selling this property and using the proceeds to buy another one. However, you come across another property that has an NOI of $30,000. Since this property will generate a higher return on investment, you decide to sell your current property and buy the new one.
- You’re planning to purchase a rental property for $100,000. This property earns an NOI of $15,000. You discover another property also priced at $100,000. However, this property generates an NOI of $25,000. The second property provides a higher return on investment, so you decide to buy it instead.
What’s the bottom line?
Understanding how to calculate NOI allows you to make smart real estate decisions and ensure your rental property performs effectively in West Fargo and its vicinity. If calculating NOI or ROI is not your strength, rest assured the professionals at Real Property Management Ambassadors are here to help. Our local office offers accurate data on your investment property’s profitability and competitiveness, customized to your specific rental market. Get in touch today to learn more.
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.
