As a real estate professional serving investment clients, you need to be very familiar with all the methods of valuation of income properties. One of these is the calculation of Net Operating Income, as it is used with cap rate to determine the value of a property.
Difficulty: Easy
Time Required: 5 minutes
Here's How:
- Determine the Gross Operating Income (GOI) of the property:
Gross Potential Income - Vacancy and Credit Loss = Gross Operating Income
- Determine the operating expenses of the property. This would include expenses for management, legal and accounting, insurance, janitorial, maintenance, supplies, taxes, utilities, etc.
- Subtract the operating expenses from the Gross Operating Income to arrive at the Net Operating Income. Using the example of a property with a gross operating income of $52,000 and operating expenses of $37,000, our net operating income would be:
$52,000 - $37,000 = $15,000 Net Operating Income
Tips:
- Be very careful to get all the operating expenses into the calculation. Missing expenses will increase net operating income and thus cause your client to overpay for the property based on valuation using cap rate.
- For the most used investor calculations explained and a spreadsheet to calculate them, take this link.
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What You Need:
- Calculator
- Comprehensive itemization of operating expenses.
