It is necessary for anyone beginning to work with investment real estate to understand the various components that make up a rental property’s profitability and might subsequently determine whether a real estate will make the real estate investment decision to buy or pass.
The gross operating income (GOI) of a rental property is an essential part of any real estate analysis because it represents the actual annual income an investor can expect to collect from the property for rented space and other income after deductions for vacancy and credit loss.
What is GOI?
Gross operating income reflects the annual rental income collected from all the occupied units as well as income from any other source (i.e., coin-operated laundry facilities).
Here’s a typical way you might see it presented in a real estate cash flow analysis.
Gross scheduled income (GSI)
less Vacancy and credit loss
= Effective gross income (EGI)
plus Other income
= Gross operating income (GOI)
You are evaluating the income and cash flow performance on a ten-unit apartment complex that is currently fully rented at $700 per unit per month and generates another $100 per month from coin-operated washers and dryers. You want to know the property’s GOI but to be on the safe side you feel it necessary to include a vacancy and credit loss of 3%.
Gross Scheduled Income
You first need to know the gross scheduled income. Bear in mind that gross scheduled income always represents the potential income as if the units were fully occupied so you would always account for vacant units at a market rent. But in this case, since you have no vacant units to account for, you can simply multiply the monthly income by the number of units by 12 to find the annual amount:
Gross Scheduled Income = (700 x 10) x 12 = 84,000
Vacancy and Credit Loss
Next, you need to figure the 3% vacancy and credit loss of the gross you estimate will likely occur during the year and subtract that amount from the gross to determine the effective gross income.
Vacancy and Credit Loss = 84,000 x 0.03 = 2,520.
Effective Gross Income = 84,000 – 2,520 = 81,480
Finally, you add the annual income generated from the laundry facilities (100 x 12 = 1,200) to the EGI to arrive at the GOI.
Gross Operating Income = 81,480 + 1,200 = 82,680
Okay, now understand why this income and cash flow that equates GOI is important to derive when evaluating a rental income property.
Picture what occurs next.
Gross operating income less operating expenses equals net operating income less debt service equals cash flow before taxes.
Gross operating income (GOI)
less Operating expenses
= Net operating income (NOI)
less Debt service
= Cash flow before taxes (CFBT)
In other words, the gross operating income of a rental property represents the actual annual income generated from which the real estate investor must ultimately cover all the property’s annual operating expenses and mortgage payments.
So the conclusion is obvious.
When the GOI is sufficient enough to cover the property’s operating expenses and debt service the real estate investor can at least count on the property covering itself without having to feed it. Otherwise the investor will have to cover the negative cash flows out-of-pocket and perhaps regret that he or she owns a rental property loser.
So You Know
Gross operating income is automatically calculated and inserted into all reports provided by all three ProAPOD Real Estate Investment Software solutions.