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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 Pittsburgh 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 walk you through calculating your NOI and explain the factors that can impact this number.

What is net operating income (NOI)?

The NOI, or net operating income, is the annual income of a single-family rental property after operating expenses are deducted. This figure encompasses rental income as well as other income sources, such as laundry and parking fees. Mortgage payments and capital expenses, like repairs or renovations, are not part of this figure.

How to Calculate NOI

While there are various methods to calculate NOI, the most typical approach 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, make sure to account for all income sources. This encompasses rental income from tenants as well as any additional fees or charges, like pet fees or parking fees.

Next, include only operating expenses. This includes expenses such as property taxes, insurance, and repairs. It does not include mortgage payments or capital expenses, such as renovations.

Factors that can affect your NOI

Various factors can influence your NOI. You can control some of these factors, but others are beyond your control.

  • Rental income: The amount of rental income you generate has a direct impact on your NOI. If you raise rent prices or lease to higher-paying tenants, your NOI will rise.
  • Operating expenses: The operating expenses can differ each year. Lowering these expenses will increase your NOI.
  • Interest rates: Changes in interest rates can impact your NOI if you have a mortgage on your rental property. When interest rates rise, your mortgage payments increase, leading to a lower NOI.
  • Vacancy rates: An increase in vacancy rates reduces rental income, thereby decreasing NOI.

As demonstrated, numerous factors can affect your NOI. However, it’s key to remember that many of these factors are under your control. Monitoring and adjusting as necessary can help you maintain a healthy NOI and ensure your property remains profitable.

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 thinking about buying a property or evaluating different investments, NOI is a powerful tool in your decision-making process.

Here are a few ways to use NOI in practice:

  1. You’re looking at purchasing a rental property for $200,000. It has an NOI of $20,000. The property generates an NOI of $20,000. This equates to a return on investment (ROI) of $20,000/$200,000, or 10%. Given this good ROI, you decide to purchase the property.
  2. Your rental property has an NOI of $15,000. You are contemplating selling the property and using the proceeds to purchase another property. You find another property that generates an NOI of $30,000. With a higher return on investment, you choose to sell your current property and buy the new one.
  3. You are contemplating purchasing a rental property priced at $100,000. This property earns an NOI of $15,000. You locate another property also for sale for $100,000. This property, however, has an NOI of $25,000. The second property offers a higher return on investment, leading you to purchase it 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 Pittsburgh and surrounding areas. If you find calculating NOI or ROI challenging, the professionals at Real Real Property Management Keystone are available to help. We can provide accurate data on your investment property’s profitability and competitiveness, tailored to your specific rental market, through our local office. Reach out to us today to find out more.

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