As a Portland rental property owner, fully grasping your net operating income (NOI) is essential and empowering. This critical figure, used by property owners, banks, and lenders, enables you to gauge 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 amount comprises rental income and additional income sources like laundry fees or parking fees. This excludes mortgage payments and capital expenses, such as repairs or renovations.
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 covers rental income and other fees or charges you collect, including pet fees or parking fees.
Secondly, only include 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
Various factors can influence your NOI. Some of these factors are within your control, while others are not.
- Rental income: The rental income you earn directly affects your NOI. If you can raise rent prices or lease to tenants who pay more, your NOI will go up.
- Operating expenses: The operating expenses can differ each year. Keeping these expenses down will result in a higher 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 you can observe, multiple factors influence your NOI. Yet, it’s crucial to remember that many factors 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
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 a few ways to use NOI in practice:
- 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 equates to a return on investment (ROI) of $20,000/$200,000, or 10%. Seeing this good ROI, you choose to buy the property.
- Your rental property has 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. 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 has an NOI of $15,000. You locate another property also for sale 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?
By learning to calculate NOI, you can make savvy real estate decisions and ensure your rental property performs well in Portland and nearby. If calculating values like NOI or ROI isn’t your forte, don’t worry; the experts at Real Property Management Evertrust are here to assist. We can provide accurate data on your investment property’s profitability and competitiveness, tailored to your specific rental market, through our local office. Contact us today for more information.
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