A property’s gross income may indicate its worth, but its net operating income holds far more value to interested investors. If you’re thinking about investing in a property, you may want to use a net operating income calculator to determine how operating fees and rent may influence your income stream.
What is Net Operating Income Calculator?
Your net operating income is the income that you can take home every month after paying out a property’s related expenses. A net operating income calculator helps you to calculate what kind of ROI you can get from an available property.
What Expenses Affect the NOI?
Your gross income includes the operating expenses (OpEx) you have to see from month to month. It’s those expenses – your losses – that transform that number from your overall intake to your net operating income.
In turn, you can expect the following operating expenses to regularly influence your budget:
- Management Fees– If you want to take a hands-off approach to your property, expect management fees to affect your net operating income. When you use a property manager, you can take on a more passive role in your investment — at the cost, of course, of a chunk of your income.
- Maintenance– No property stays standing on its own. Whether tenants report rising problems or you want to clean up a property before putting it on the market, you’ll face maintenance fees.
Maintenance fees, however, are wont to change. The expenses you face one month aren’t going to be the same as the ones you might see a few weeks down the line. Because of this, there may be some months where your budget is more flexible and others where you may even take a loss, depending on what kind of repairs or updates your property requires.
- Legal Support– Whether you need to evict a tenant or draft a lease, a property attorney can be a helpful resource. Legal fees, however, are part of your regular property expenses. As such, you’ll want to integrate them into any budget you set up prior to investing.
- Unpaid Utilities– If you have empty units on your property or a tenant has missed a utility payment, then the bills for that unit will fall back on you. While you may not have to deal with these expenses often, they can still take a chunk out of your gross income from month to month.
- Property Taxes– Taxes are inescapable, especially as a landlord. Property taxes vary from state to state, which means that you can seek out investments with tax rates that are kind to your pocketbook.
Even so, you should budget for this expense as you collect rent; otherwise, the eventual cost may come as a shock.
- Insurance– Property insurance protects your investments from unanticipated damage. The right coverage can help you to recover losses incurred by storms, tenants, and even a property’s own deterioration over time.
To reap these benefits, however, you’ll have to pay a fee. This fee, unlike many others impacting your net operating income, should remain consistent as long as you don’t change providers.
If you want to limit the impact of insurance on your net operating income, consider asking your provider about biannual or annual lump sum payment options. Most providers offer you a discount if you’re able to pay their fees upfront, which means that you can save some of your gross income for other tasks.
How to Calculate Net Operating Income
To calculate your net income, subtract your monthly expenses from your gross income. In formulaic terms, this equation appears as follows:
Gross Income – Operating Expenses = Net Operating Income
Note that your net operating income is rarely going to be consistent. You can expect your end result to remain within a general range throughout the year, but your monthly expenses and tenant losses are going to impact how much money you take home.
Make sure you budget carefully. The last thing you want to deal with is an unexpected loss resulting from poorly managed monthly expenses.
Does NOI Impact Residents?
A property’s tenants benefit from a strong net operating income. The more funds you have at your disposal, the more services you can perform on their behalf.
With that being said, your desire for a strong net operating income can also impact residents’ monthly rent. If you want to estimate your potential income before investing in a property, play around with the rent rates that may make the property more valuable.
If you choose to invest in a property and list it for rent, you can then be certain that tenants are paying rent based both on the lot’s value and on your own financial needs.
When to Use a Net Operating Income Calculator
When you invest in a rental property, you want to know that it’s worth your time. A property with a strong gross income is only as valuable as its net operating income.
Use a net operating income calculator to determine a property’s worth ahead of time, and you can craft an investment portfolio that performs well.