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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 Fort Lauderdale rental property owner, fully grasping your net operating income (NOI) is essential and empowering. This figure, vital for property owners, banks, and lenders, provides a means to 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 amount comprises rental income and additional income sources like laundry fees or parking fees. This figure excludes mortgage payments and capital expenses, such as repairs or renovations.

How to Calculate NOI

Several methods exist to calculate NOI, but the most common is to subtract operating expenses from the 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. Firstly, ensure all sources of income are included. This includes rental income from tenants and other fees or charges, such as pet fees or parking fees.

Next, ensure only operating expenses are included. This involves property taxes, insurance, and repairs. This figure excludes mortgage payments and capital expenses, like renovations.

Factors that can affect your NOI

Multiple factors can affect your NOI. Some of these factors are within your control, while others are not.

  • Rental income: Your NOI will be directly impacted by the rental income you generate. Increasing rent prices or leasing to higher-paying tenants will raise your NOI.
  • Operating expenses: Operating expenses may vary each year. By keeping these costs low, you can boost your NOI.
  • Interest rates: Having a mortgage on your rental property means that changes in interest rates can affect your NOI. Increased interest rates will result in higher mortgage payments, reducing 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

With your newfound knowledge of calculating NOI, you can use this information to make well-informed real estate decisions. Whether considering a property purchase or comparing investment opportunities, NOI is a valuable tool in your decision-making toolkit.

Here are several practical examples of using NOI:

  1. You’re planning to buy a rental property for $200,000. It has an NOI of $20,000. This property has an NOI of $20,000. This results in a return on investment (ROI) of $20,000/$200,000, or 10%. Seeing this good ROI, you choose to buy the property.
  2. You currently own a rental property with an NOI of $15,000. You are thinking about selling this property and using the proceeds to buy another one. You discover 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 are thinking about buying a rental property for $100,000. The property generates an NOI of $15,000. You find another property available for $100,000. However, this property generates an NOI of $25,000. Since the second property has a higher return on investment, you choose to buy it instead.

What’s the bottom line?

Understanding how to calculate NOI helps you make informed real estate decisions and ensures your rental property performs optimally in Fort Lauderdale and nearby areas. Should you find calculating values like NOI or ROI difficult, know that the professionals at Real Real Property Management Coral are here to help. Our local office can deliver 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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