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.
How to Calculate Gross Operating Income?
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?
- 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
- Property Taxes
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.
Gross Operating Income Formula (GOI)
The formula to calculate the gross operating income (GOI) is as follows:
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).
Gross Operating Income Calculator (GOI)
We’ll now move on to a modeling exercise, which you can access by filling out the form below.
Gross Operating Income Calculation Example (GOI)
Suppose a real estate investor is calculating the gross operating income (GOI) of an existing property investment.
The property investment is a residential building with a total of 150 units, with the market rate rent estimated to be around $3,200 per unit.
- Total Number of Property Units = 150
- Monthly Rent per Unit = $3,200
The gross potential rental income per month is the product of the number of property units and monthly rent, which amounts to $480,000.
- Gross Potential Rental Income – Monthly = 150 × $3,200 = $480,000
Since the gross operating income (GOI) is computed on an annual basis, we must annualize the prior figure by multiplying by 12.
Once converted, the annual gross potential rental income is $5.76 million.
- Gross Potential Rental Income – Annual = $480,000 × 12 = $5,760,000
From there, we must add any other sources of income, which we’ll assume to be $240,000.
- Other Income = $240,000
The sum of the rental income and other income – $6 million – represents the potential gross income (PGI) of the residential building.
- Potential Gross Income (PGI) = $5,760,000 + $240,000 = $6,000,000
In the final part of our exercise, we must adjust the building’s potential gross income (PGI) by the vacancy loss and credit loss using the following set of assumptions.
- Vacancy Loss = 6.0% of PGI
- Credit Loss = 4.0% of PGI
The vacancy loss is projected to be $360k, while the credit loss is expected to be around $240k.
- Vacancy Loss = 6.0% × $6,000,000 = $360,000
- Credit Loss = 4.0% × $6,000,000 = $240,000
In conclusion, we can deduct the vacancy and credit losses from the property’s potential gross income (PGI) to arrive at a gross operating income (GOI) of $5.4 million.
- Gross Operating Income (GOI) = $6,000,000 – $360,000 – $240,000 = $5,400,000