What is Gross Operating Income?
Gross Operating Income (GOI) in real estate is the total income generated by a property after deducting vacancy and credit losses.
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How to Calculate Gross Operating Income (GOI)
In real estate, the gross operating income (GOI) metric measures the income potential of a rental property net of losses related to vacancies and credit (collection) issues.
The gross operating income (GOI) is the total income expected to be collected per year.
The gross operating income (GOI) can be calculated using the following three-step process.
- Calculate Potential Gross Income (PGI) → PGI is the total income generated by a property under the hypothetical scenario in which all property units are rented out at the market price, and there are no issues related to collecting payments from tenants.
- Estimate Vacancy and Credit Losses → Vacancy and credit losses stemming from unoccupied property units (i.e., units with no tenants) and tenants that are either incapable of or are refusing to fulfill their obligation to pay rent on time. Usually, vacancy and credit losses are calculated as a percentage of the PGI. The percentage assumption should be set based on historical data and in-depth market research, i.e. based on comparable properties in the same or nearby location.
- Subtract Vacancy and Credit Losses from PGI → Once the vacancy and credit losses are estimated, apply the deduction to the potential gross income (PGI) of the property, which results in the gross operating income (GOI).
Thus, the gross operating income (GOI) is the potential gross income (PGI) of a rental property minus any vacancy and credit losses.
- Vacancy Losses → While vacancies are inevitable, offering incentives such as free months to potential tenants is an example of a common method to reduce the risk of unoccupied units remaining without a tenant (and not producing any income on behalf of the property owner).
- Credit Losses → On the other hand, credit losses are more of an unpredictable variable. The most effective mitigating factor is a stringent tenant screening procedure. However, the risk of a tenant being unable to meet their rental payment obligations can often appear without notice.
The gross operating income (GOI) is adjusted for vacancy and credit (collection) losses. However, the metric does reflect the profit potential of the property.
Why? The operating expenses incurred by the property owner or the real estate investor have not yet been deducted.
Therefore, the gross operating income (GOI) offers insights into the property’s cash flow profile and if enough is brought in to cover its operating expenses.
GOI vs. NOI: What is the Difference?
The gross operating income (GOI) and net operating income (NOI) are two closely related real estate metrics used to analyze potential or existing property investments.
- Gross Operating Income (GOI) → GOI is the total income that a property is expected to generate after adjusting for vacancy and credit losses, but prior to deducting operating expenses.
- Net Operating Income (NOI) → NOI is arguably the most important metric in real estate and represents the remaining income once all direct operating expenses have been deducted from the property’s GOI.
The operating expenses incurred while running the property costs include the following:
- Property Management Fees
- Property Insurance
- Repair and Maintenance Costs
- Utilities
- Property Taxes
However, the net operating income (NOI) metric does NOT deduct any financing costs (e.g. mortgage payments) or depreciation.
The relationship between gross operating income (GOI) and net operating income (NOI) boils down to the property’s operating expenses.
Unlike GOI, the NOI metric deducts operating expenses to provide a clearer picture of the true profitability of the property.
The following formula illustrates how net operating income (NOI) and gross operating income (GOI) are connected.
Understanding the gross operating income (GOI) metric is thereby important because GOI is a necessary input in the formula to compute net operating income (NOI).
Note: If analyzing net operating income (NOI) at the property level, only direct operating expenses are deducted.
Learn More → Net Operating Income (NOI)
Gross Operating Income Formula (GOI)
The formula to calculate the gross operating income (GOI) is as follows:
Where:
The potential gross income (PGI) of a property will be composed of predominately rental income, i.e. the periodic rent payments received from tenants as part of a contractual rental agreement.
However, a property can generate income from other sources, as well, which must also be included in the calculation.
For instance, the most common sources of other income are payments for using premise amenities (e.g. gym), non-refundable tenant application fees, late fees on rent, pet fees, and various types of on-premise services (e.g. vending machines, laundry, parking permits, storage units).
