Understanding Gross Scheduled Income and Gross Operating Income

gross scheduled incomeIn any real estate analysis previewed you will typically see in such reports as an APOD or Proforma Income Statement an amount shown for both Gross Scheduled Income (GSI) and Gross Operating Income (GOI).

So what are these income values, how do they differ, and what impact do they have on the bottom line of the property you are evaluating?

Okay, let’s take a look.

Gross Scheduled Income

Gross scheduled income is considered as the gross income that would be collected from a rental property with all units 100% occupied and rented. That is, it is the amount of annual rental income that would be collected if the property experienced zero vacancy and credit loss. To make this happen, vacant units (if they exist) are included in the calculation at a fair market rent.

In other words, if you have a rental income property consisting of eighty units with two units vacant where the occupied units are currently rented for $740 and you feel the market rent should be $750. You would compute the GSI by showing the occupied units at their current rent of $740 and the vacant units at $750.

78 units occupied @ 740 = 692,640
+ 2 vacant units @ 750 = 18,000
GSI = 710,640

Naturally no experienced real estate investor (hope as they might) ever expects to have all the units occupied all of the time; nor do the lenders.  Therefore it is prudent to subtract a reasonable amount for vacancy and credit loss from the gross scheduled income to arrive at what is called an effective gross income (or EGI).

Effective Gross Income

Here’s how it works. Let’s assume a gross scheduled income of $710,640 and a vacancy and credit loss of 5.00%. The effective gross income is computed this way.

$710,640
– 3,552 (5% of 710,640)
EGI = 707,087

Gross Operating Income

Okay, now we’re ready to compute the gross operating income. This final step adds the revenues collected from other sources of income generated by the property (i.e., coin operated washers and dryers, garages, storage units) to the effective gross income. To illustrate this we’ll assume that all other income annually generated by the property totals $18,000.

$707,087
+ 18,000
GOI = 725,087

Why Do Investors Care?

Fair enough, so why do real estate investors care about these numbers in their real estate analysis?

Foremost, because gross scheduled income and gross operating income each refer to the annual revenue generated by an income property (albeit differently), and as such each expresses something about a property’s financial performance. GSI reveals the total income potential that can be collected annually from rents, while GOI (which evolves from GSI) discloses the actual income an investor can expect to collect to service the property’s operating expenses and debt service.

Here’s to your real estate investing success.