What is NOI?
Net operating income, or NOI, is a measurement used to determine the potential profitability of a property. It’s a commonly used tool when deciding if it will be beneficial to invest in a specific rental property or not.
NOI analyzes the operating costs of a property to gain insight into the amount of revenue that can be generated. The NOI formula itself is fairly simple:
Net Operating Income = Gross Operating Income – Operating Expenses
Gross operating income is easy to calculate. In short, it is anything that brings you money from your property. It’s usually made up of the rent and fees that you get from guests. Keep in mind that it is gross operating income, so don’t subtract any taxes or expenses from it yet.
Operating expenses can be the hardest thing to calculate. Essentially, they are anything that you have to spend money on to keep your property running. If you can manage not to spend money on something and your business still generates income without that cost, that expense is not classified as an operating expense. Some examples of common operating expenses include property taxes, supplies costs, utilities and insurance.
Why is NOI important for vacation rentals?
When trying to decide whether to buy a vacation rental property, it’s important that your NOI score is more than the price you pay for the property itself. The higher the NOI score relative to the price, the higher the likelihood of a profitable return on your investment and of generating revenue from that property. If your NOI score is lower than the price, then it would be advisable to set your sights elsewhere.
If your property has been handed down from prior generations, and you want to determine if you should use it as a vacation rental or not, calculating NOI can help you decide if you should go ahead with creating your business or if you should sell or invest the property in a different way.
A property can have an amazing location and seemingly great potential to attract guests, but if the operating expenses run too high in comparison to the income, the chances of making considerable revenue from it drop. There’s a good intention, but maybe this property isn’t meant to be a vacation rental. It’s all about making sure that the benefits outweigh the costs.