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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 Sarasota rental property owner, fully grasping your net operating income (NOI) is essential and empowering. This metric, crucial for property owners, banks, and lenders, helps you assess your property’s performance.

We’ll teach you the steps to determine your NOI and the factors that can influence this figure.

What is net operating income (NOI)?

Net operating income (NOI) represents the annual income of a single-family rental property after deducting operating expenses. 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

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

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

Several elements can impact your NOI. You can control some of these factors, but others are beyond your control.

  • Rental income: The rental income you earn directly affects your NOI. Higher rent prices or leasing to tenants who pay more will result in a higher NOI.
  • Operating expenses: Operating costs can fluctuate annually. By keeping these costs low, you can boost your NOI.
  • Interest rates: If your rental property is mortgaged, variations in interest rates can impact your NOI. Increased interest rates will result in higher mortgage payments, reducing your NOI.
  • Vacancy rates: Rising vacancy rates result in decreased rental income and subsequently lower NOI.

As shown, several elements can influence your NOI. However, keep in mind that many of these factors are controllable. 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

Equipped with the knowledge of calculating NOI, you can now use this information to make smart real estate decisions. Whether you’re considering buying a property or comparing investment opportunities, NOI is a powerful asset in your decision-making toolkit.

Here are several practical examples of using NOI:

  1. You’re looking at purchasing a rental property for $200,000. It has an NOI of $20,000. This property has 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.
  2. 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.
  3. You’re planning to purchase a rental property for $100,000. This property earns an NOI of $15,000. You come across another property for sale at $100,000. This property, however, has 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?

Knowing how to calculate NOI enables you to make intelligent real estate decisions and ensures your rental property performs well in Sarasota and nearby. If you’re not comfortable calculating NOI or ROI, the experts at Real Property Management Suncoast are here to assist you. Our local office offers accurate data on your investment property’s profitability and competitiveness, customized to your specific rental market. Contact us now to learn more.

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