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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.For a Anchorage rental property owner, a deep understanding of your net operating income (NOI) is crucial and empowering. This number, an essential metric for property owners, banks, and lenders, lets you evaluate 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 net operating income (NOI) is the annual revenue of a single-family rental property after subtracting operating expenses. It includes rental income and other forms of income like laundry and parking fees. Mortgage payments or capital expenses, including repairs or renovations, are not included.

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

Keep several important aspects in mind when calculating your NOI. First, include every source of income. This means accounting for rental income and other collected fees or charges, such as pet fees or parking fees.

Next, include only operating expenses. This covers 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 factors you can control, while others you cannot.

  • Rental income: Your NOI will be directly impacted by the rental income you generate. If you raise rent prices or lease to higher-paying tenants, your NOI will rise.
  • Operating expenses: Operating expenses may vary each year. If you manage to reduce these costs, your NOI will rise.
  • Interest rates: Having a mortgage on your rental property means that changes in interest rates can affect your NOI. When interest rates rise, your mortgage payments increase, leading to a lower NOI.
  • Vacancy rates: Increased vacancy rates decrease rental income, which in turn decreases NOI.

Clearly, various factors can impact your NOI. Nonetheless, it’s important to note that many of these factors can be controlled. By regularly 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

Having learned how to calculate NOI, you can now apply this information to make 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 a few practical examples of using NOI:

  1. You’re contemplating buying a rental property priced at $200,000 with an NOI of $20,000. The NOI for this property is $20,000. This provides a return on investment (ROI) of $20,000/$200,000, or 10%. Given this good ROI, you decide to purchase the property.
  2. You have a rental property with an NOI of $15,000. You’re considering selling this property and using the funds to buy a different one. You find another property that generates 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 are thinking about buying a rental property for $100,000. The NOI of this property is $15,000. You find another property available for $100,000. Meanwhile, this property has an NOI of $25,000. Given the higher return on investment, you opt to purchase the second property instead.

What’s the bottom line?

By knowing how to calculate NOI, you can make wise real estate decisions and ensure your rental property performs well in Anchorage and surrounding areas. Should you find calculating values like NOI or ROI difficult, know that the professionals at Real Real Property Management Last Frontier 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. Get in touch with us today to learn more.

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