# How to Calculate Gross Operating Income (GOI) in Real Estate

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If you are considering investing in a rental property, you are probably crunching numbers to figure if an investment makes sense for you. One metric to consider is gross operating income (GOI). Learn why gross operating income is important for your rental property and how to calculate it.

### Key Takeaways

• Gross operating income is what you'd make as a landlord by renting a property for a year after taking away some losses
• Gross operating income can be calculated by subtracting losses due to vacancy and non-payment from gross potential income
• In addition to income, factors for a successful rental investment include the cost of acquiring the property and costs of owning and operating the rental

## How to Calculate Gross Operating Income

Gross operating income is what you'd make as a landlord by renting a property for a year after taking away some losses. The first step in calculating gross operating income for a rental property is to determine its gross potential income.

### Note

Gross potential income is the amount of money you'd make in a year if all of your rental property was rented throughout the year and you received all the rent that was due to you.

### Formula and Example of Gross Operating Income for Rental Property

You can use a simple formula to calculate gross operating income for your rental.

Gross operating income = Gross potential income - vacancy loss - credit loss

Let's consider an example. You've got three apartments in building A that you would like to rent for \$700/month and three apartments in building B that you'd like to rent \$800/month. If all apartments get rented, all through the year, here's what your gross potential income would look like.

Monthly potential rent from building A= 3*\$700 = \$2,100
Annual potential rent from building A= \$2,100 *12= \$25,200

Monthly potential rent from building B= 3*\$800 = \$2,400
Annual potential rent from building B= \$2,400 *12= \$28,800

Gross potential income from both buildings = \$25,200 + \$28,800 = \$54,000

Now assume our losses due to vacancies and non-payment will be 5%. Then loss due to vacancy would be \$2,700 (\$54,000 *.05). Plugging those numbers in the formula for gross operating income, we get:

Gross Operating Income = \$54,000 - \$2700= \$51,300

Let's think about the rental property investment and break down the two major components, income and expense. We'll start with expenses.

The expenses that are involved in rental property investment are some cash and others accounting entries, such as depreciation. So, not every expense is cash out of pocket. The actual ownership and operating costs include:

• taxes
• mortgage interest
• management expenses
• legal and accounting
• some utilities
• repairs and maintenance
• vacancy and credit loss
• costs of acquisition and sale

Those are all pretty well-defined, and we have some control over some of them. We can shop and negotiate some of them to reduce those expenses. The point is that they are going to have what we can pretty accurately estimate as maximum amounts we can use in ROI and profit calculations. They aren't things we can change dramatically; that is unless you can get taxes repealed or lawyers and accountants to work for free.

When it comes to income, however, things are less quantifiable because we have more opportunity and a little more control. Let's think about some of the ways in which income is determined and variable.

## The Initial Property Acquisition

How well we do our due diligence to locate bargains is the first control we can exercise over income. Not only is it about finding a bargain, but also about knowing the best location, neighborhood, and property characteristics will be best for rental.

### Note

Keep in mind the features and amenities that renters want, and they are mainly what buyers want. Go check out some new homes in hot subdivisions. Perhaps there are some relatively inexpensive things you can do to make the home you buy more desirable, thus more in demand.

Once you figure out where to buy, you do your research and locate possible properties. You do some more due diligence and a whole lot of calculations. Once you find the right one, it's time to negotiate your way to a price that's below current market value.

## Setting the Right Rent

Now, it's easy just to say, get as much as possible, but that's not necessarily the best approach. You take into account the prevailing rents and how your property fits in with features and competitive edge. Then calculate your losses when the property is vacant between tenants. You see, if the rent is set too high, you will probably experience more ​vacant time so that you may lose all or even more of your gains from the higher rent. That's control, and you have some.

## Tenant Relationships, Advertising, and Management

Now that you have tenants in place, keeping them as long as possible at prevailing rents is a great approach, and you have some control of that. Great tenant relations, excellent service, good complaint handling techniques all come together as management techniques to maximize income.

### Note

Doing all of the right things in marketing, lease application and interview processes and ongoing management will keep your income flowing and cut down on vacancy and credit loss.

As you can see, you have more things you can influence or control on the income side than on the expense side. Spend the time necessary to get the expense side tightened up, but concentrate on the income side items to get the most out of your rental investment.

## What is gross operating income in real estate?

Gross operating income (GOI) is what you'd make as a landlord by renting a property for a year after taking away some losses. To calculate GOI, start with gross potential income which is the income you'd earn if all your rental properties were occupied and paid due rent throughout the year. Subtract losses due to vacancy or non-payment dues, and you arrive at the gross operating income.

## What is the difference between gross profit and operating income?

Gross profit is the amount of money you'd make from your rental property prior to taking out fees and taxes. Operating income is a measure of profitability of a rental property. Gross operating income for a rental property is the money that a landlord can make in a year after taking out any losses they would incur on account of vacancies or non-payment of rent by tenants.