Everyone wants to see growth, but as a landlord, you want to financially grow your rental property as much as you can. Whether you struggle with increasing your gross revenue each month or not, understanding how you can improve your property’s net operating income (or NOI) is vital to seeing your investment blossom.
What is Net Operating Income?
According to Investopedia, net operating income (or NOI) is “a calculation used to analyze real estate investments that generate income.” It equals all of your revenue from your rental properties (minus any of your operating expenses).
While your property’s revenue might primarily come from rental payments, other generated income might be parking fees, service fees (like from coin-operated laundry machines), or late fees. Operating expenses can consist of your insurance, internal expenses, utilities, property taxes, and any additional repairs or maintenance expenses.
Quick Tip: Your NOI is calculated before taxes, and often does not include payments on loans, capital expenditures (funds used to acquire or upgrade the rental property), depreciation, and amortization (debt payments in installments).
How you can Improve your Property’s NOI?
Let’s be frank: everyone who owns a rental property or two wants to improve their property’s NOI. Your net operating income is a top factor in calculating the investment value of your rental, and can showcase financial growth. In order to drive the value of your rental property, you need to increase your NOI. Here’s 3 ways you can do that:
- Increase your revenue
As you can guess, increasing the rent is the most common way to drive NOI. Depending on your rental market, you may be experiencing a boom of rent growth, or a decline in growth. Nationally for October 2017, Apartment List has reported that this month the rent index is down by .1% after an 8 month streak of rising rents this year. The top 3 major cities to experience a year to year rental growth are Sacramento, CA with 9.7%; Reno, NV with 9.7%; and Arlington, TX with 8.6%.
Beyond raising the rent, you can raise your revenue through rental application fees, late fees, pet deposit and pet rent. Just make sure you’re complying with county, city and state law. The City of Seattle currently prohibits rental properties from charging pet fees.
- Decrease your expenses
Another way you can improve your NOI is by reducing your operating expenses. Common expenses consist of repairs and maintenance, utilities, contract services, administrative expenses, advertising or marketing, and prepping vacancies. While cutting how much you spend on repairs and maintenance can jeopardize your property in the long run, there are plenty of other expenses that you can reduce.
Installing water-saving devices can help you save on your water utility bill, cutting down on office supplies like paper and ink by taking your files online and into the cloud can help save on administrative expenses, and utilizing free rental property listing websites can help save on marketing. Using a cost-free tenant screening service, like ApplyConnect, can also reduce your yearly expenses if you have any vacancies. Finding ways to cut down on expenses might take some time, but ultimately will help improve your property’s NOI in the long run.
- Increase resident retention
Move outs can be excessively expensive. It takes valuable time away from you to prep the vacancy, market the unit and find new tenants, and you lose out on a month or two of rental income for that vacancy. Every renewed lease means continued rental payments (and less wasted time and money prepping a unit). A few ways to increase lease renewal rates are providing incentives and upgrading your rental units. Providing administrative upgrades like processing rental payments online can also have a big impact on your landlord-tenant relationship.
Increasing your NOI each year can be a tough challenge to overcome. It depends primarily on the market – with your main source of income being rent – and can be significantly impacted by a lot of little expenses and renter move outs. While not every year will be perfect, keep these three NOI boosting factors in mind as you consider rental increases, take on new internal processes to reduce your expenses, and try to increase tenant retention. It’s all connected.
What is the biggest factor that’s impacting your NOI? Have you increased your property’s NOI through these ways before?