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When you own and manage rental property, you probably want to keep track of what you are earning in exchange for your efforts. Whether you are looking for returns on an investment or are just curious how worthwhile renting your property is, a net operating income calculator can help.
This simple calculation shows people their actual earnings or the profit potential of a property using just a few figures. Let's take a closer look at what it is, how it works, and what it tells you.
What Is Net Operating Income?
Put simply, net operating income (NOI) is your overall earnings after you deduct expenses. That means the amount you walk away with at the end of the day once everything is paid.
It is used by investors as a way to measure the profit potential of a rental property or other income-generating real estate purchase.
How Does a Net Operation Income Calculator Work?
A NOI calculator works by comparing your income and expenses. Some have multiple input boxes for different types of earnings or expenses that you fill out one by one, while others expect you to have already combined the totals for each.
The calculation is made using two primary variables:
- Gross operating income (everything you earn through that property)
- Total operating expenses (everything you spend in relation to the property)
By inputting this information into a NOI calculator, you instantly get your net operating income- which can then be used for various other calculations.
What Affects Net Operating Income in Real Estate?
Now that we know how NOI calculators work and what the variables are, let's look at the things that impact your net operating income as a rental property owner.
What Sources of Income You Have
Rental income is the primary source of income for the majority of properties in this category- particularly if you invest in a residential space. The rent you charge each month to each tenant directly impacts your income.
That said, some real estate property investments may have other income sources. Some real estate investors who go down the commercial property road have income generated through services offered via the building.
Even if they still collect regular rent from a paying tenant, they may supplement their income with additional spaces on their property, parking fees, laundry machines, etc.
Your Occupancy/Vacancy Rate
If the bulk of your property's income comes from rent, you ideally want to have an occupied property all the time, but that doesn't always happen.
Unless you have a long-term lease for the unit or units, you may experience some vacancy periods throughout the year. Vacancy costs in the real estate property and rental industries will cut into your net operating income.
A property may have a potential rental income of $2,000 per month or $24,000 per year, but if it is vacant 50% of the time, it will only generate $12,000.
Your Operating Expenses
The more you spend, the less profit you make. Some operating expenses are unavoidable for any property, such as property taxes, property management fees, insurance costs, etc.
It is one of the things to take into consideration when comparing investments. Look into what the taxes are likely to be and how much it should cost to insure. Some buildings also have higher maintenance fees and demand more spending.
If you are looking for an investment property that can generate a higher net operating income, it is better to look for a building that has no major maintenance concerns.
How to Calculate Net Operating Income
Calculating NOI is simple.
- Gross operating income - Total operating expenses = Net operating income
In other words, take everything the property earns, subtract everything it costs, and that gives you the NOI.
Example of Using the Net Operating Income Formula
Here is an example of the NOI calculation in use.
An investor owns a four-unit apartment building. Each apartment has a rental income of $1,500 per month or $18,000 per year. At full occupancy, the rental income potential of the whole unit is $72,000.
Three apartments are occupied by long-term tenants, but one was vacant for the first six months of the year. That makes the vacancy rate 12.5%.
On top of the four apartments, there is a small shared working space the owner rents for $5 per person per hour. This year, it was rented for a total of 1000 hours, bringing in $5,000 of additional income.
Combined, the total revenue generated was $68,000.
The property owner pays $3,000 a year in insurance, $7,000 in property taxes, and $4,500 in utilities for the communal areas. There were no major works required- only the standard maintenance fees, which came to $2,500.
Altogether, the operating expenses came to $17,000.
Here is what the net operating income calculation would look like.
- Rental income: $72,000 - 12.5% vacancy loss = $63,000
- Other income: $5,000
- Gross operating income = $63,000 + $5,000
- $68,000 Gross operating income
- Operating expenses = $3,000 + $7,000 + $4,500 + $2,500
- $17,000 Gross operating expenses
- Net operating income = $68,000 - $17,000
- Net operating income = $51,000
This means the investor earned $51,000 from this property this year before tax.
How to Leverage Net Operating Income in the Rental Property Industry
Once you have your NOI, it can be used in other calculations to establish return rates (Cap rate, for example).
The main way net operating income is leveraged is by investors looking at the potential profitability of a unit before they buy it. If they know the rental revenues from recent years and the average expenses, they can estimate what income it could generate for them in the future.
What Is a Good Net Operating Income?
Good net operating income is relative to how much you invested to begin with. There isn't really a definitive cut-off for what is good and what is not- it depends on the return the investor wants to see.
Someone who invested $1 million may be unhappy with an annual NOI of $10,000, as it only represents 1% of what they paid. If someone generates $10,000 NOI in a year on a $100,000 investment, they may be much happier.
What Can DoorLoop Offer?
DoorLoop is a game-changing tool that helps optimize profitability and streamline your real estate operations. You can generate more income and limit your expenses when you have a smart, efficient, and convenient way to manage your properties and everything that comes with them.
As well as providing a few handy calculators for different real estate numbers, DoorLoop helps keep vacancies to a minimum with effective tenant screening, integrated marketing through Zillow and Trulia, and support to create your own website for renter applications.
It also helps you manage your profits with online rent collection, advanced accounting tools, and integrated cash flow reports.
The list of great features goes on, and there are many more ways it can help your property management business. See for yourself with a free DoorLoop demo. Schedule yours today.
Summary
Using real estate calculators can tell you a lot about your investments, including your property's net operating income. Net operating income measures how much money an asset generated. It is a useful tool for assessing the profitability of a potential investment and for tracking your progress so far for your rental unit.
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