The Essential Guide to Calculating Net Operating Income

As a rental property owner in Baton Rouge, 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 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) is the yearly income of a single-family rental property minus operating expenses. This total includes rental income and other income streams, such as laundry and parking fees. This excludes mortgage payments and capital expenses, such as repairs or renovations.

How to Calculate NOI

There are multiple ways to calculate NOI, with the most common being 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

Remember a few important factors when calculating your NOI. First, include every source of income. This covers rental income and other fees or charges you collect, including pet fees or parking fees.

Secondly, only include operating expenses. This covers property taxes, insurance, and repairs. Mortgage payments and capital expenses (e.g., renovations) are excluded from this number.

Factors that can affect your NOI

Several elements can impact your NOI. Some factors you can control, while others you cannot.

• Rental income: Your NOI is directly influenced by the rental income you generate. By increasing rent prices or leasing to higher-paying tenants, you can boost your NOI.
• Operating expenses: Operating costs can fluctuate annually. If you manage to reduce these costs, your NOI will rise.
• Interest rates: Interest rate changes can affect your NOI if your rental property is mortgaged. An increase in interest rates raises mortgage payments, thus decreasing your NOI.
• Vacancy rates: Rising vacancy rates result in decreased rental income and subsequently lower NOI.

As you can observe, multiple factors influence your NOI. Yet, it’s crucial to remember that many factors are within your control. Through monitoring and adjusting, you can maintain a healthy NOI and ensure your property’s profitability.

How to use NOI to make savvy real estate decisions

Knowing how to calculate NOI allows you to leverage this knowledge for making informed real estate decisions. NOI can be a powerful tool when deciding on property purchases or comparing investment opportunities.

Here are some practical examples of how to use NOI:

1. You’re thinking about buying a rental property for $200,000. It has an NOI of $20,000. The NOI for the property is $20,000. This translates to a return on investment (ROI) of $20,000/$200,000, or 10%. With this favorable ROI, you decide to buy the property.
2. You have a rental property with 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 provides a higher return on investment, so you opt to sell your current property and acquire the new one.
3. You’re thinking of purchasing a rental property for $100,000. This property has an NOI of $15,000. You come across another property for sale at $100,000. Meanwhile, this property has an NOI of $25,000. With a higher return on investment, you decide to buy the second property 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 Baton Rouge and its vicinity. If you’re not comfortable calculating NOI or ROI, the experts at Real Property Management Premium 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. Get in touch with us today to learn more.