For a Oklahoma City rental property owner, a deep understanding of your net operating income (NOI) is crucial and empowering. This important metric, relied on by property owners, banks, and lenders, allows you to measure 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. It comprises rental income along with other income types, such as laundry and parking fees. Mortgage payments or capital expenses, including repairs or renovations, are not included.
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
Take note of a few things when calculating your NOI. Initially, ensure you include all sources of income. This covers rental income and other fees or charges you collect, including pet fees or parking fees.
Secondly, be sure to include only operating expenses. This involves property taxes, insurance, and repairs. Mortgage payments and capital expenses, such as renovations, are not included.
Factors that can affect your NOI
Numerous factors can influence your NOI. Certain factors are under your control, whereas others are not.
- Rental income: The amount of rental income you generate has a direct impact on your NOI. Higher rent prices or leasing to tenants who pay more will result in a higher NOI.
- Operating expenses: Operating expenses can change from year to year. 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. When interest rates rise, your mortgage payments increase, leading to a lower NOI.
- Vacancy rates: Rising vacancy rates result in decreased rental income and subsequently lower NOI.
As you can observe, multiple factors influence your NOI. However, keep in mind that many of these factors are controllable. By observing and tweaking as required, you can keep a healthy NOI and guarantee your property’s profitability.
How to use NOI to make savvy real estate decisions
Having learned how to calculate NOI, you can now apply this information to make informed real estate decisions. Whether you’re considering buying a property or comparing investment opportunities, NOI is a powerful asset in your decision-making toolkit.
Below are a few examples of how NOI can be applied in practice:
- You’re planning to buy a rental property for $200,000. It has an NOI of $20,000. The NOI for this property is $20,000. This equates to a return on investment (ROI) of $20,000/$200,000, or 10%. This favorable ROI leads you to purchase the property.
- You possess 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. However, you locate 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.
- You’re considering buying a rental property for $100,000. This property has an NOI of $15,000. You find another property also listed for $100,000. However, the NOI of this property is $25,000. Since the second property has a higher return on investment, you choose 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 Oklahoma City and nearby. If you find calculating NOI or ROI challenging, the professionals at Real Real Property Management Enterprises are available to help. Our local office provides accurate data on your investment property’s profitability and competitiveness, tailored to your specific market. Contact us now to learn more.
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