Real Estate Investment Terms Part 1: Defining Income

Robert E. Cackett, PA
Published on May 22, 2020

Real Estate Investment Terms Part 1: Defining Income

In the exciting world of real estate investing you hear a variety of terms thrown around.  Terms that are often confusing because they are used in a variety of ways and often wrong.  Which means it is even more important to understand the actual definitions and functions.  This is the first of a three part series defining real estate investment terms and functions you should know as you analyze possible purchases.

In part one of this series we define terms related to Income and Cash Flow. Which are the basis for most formulas (ratios) used in real estate investing to analyze the potential strength and performance of a particular property versus other investments.

The terms below are all related to income and how it is measured in a real sense, staying away, for now, from accounting terms. Vacancy rate is included since it does affect the flow of money and is important in an initial analysis.

  • Gross Operating Income (GOI):  Refers to the total income generated by the property, typically referring to rental payments, but also includes any other real income generated such as parking fees, storage fees, or vending machine sales.  Usually measured in terms of months, it focuses on real income, ignoring other metrics such as amortization or tax benefits.
  • Operating Expenses (OE)  : Are all the costs related to maintaining and running the property as a rental.  These include, but are not limited to, property taxes, property insurance, association dues, utilities, and property management.
  • Net Operating Income (NOI): refers to what is left over after subtracting the Operating Expenses from the Gross Operating Income (GOI – OE=NOI).   This is an important number because it is the real amount an investor has left over for debt service, discretionary use, or as pass through income.
  • Cash Flow:  Is similar to NOI, but subtracts any debt service.  This is the amount of money free and clear at the end of each month, after all operating expenses INCLUDING mortgage payments are paid.  If you have money left over, you are cash flow positive. If you need to put outside money in, you are cash flow negative.
    • GOI – OE – loan payment = Cash flow
      • Or, NOI-loan payment=Cash flow
      • Does not consider the effect of Taxes
  • Vacancy Rate:  Is used in calculating the overall return of a rental property and refers to the time in terms of money, that a property is vacant or unoccupied.  Used more for analysis than in real income of a property.

The above terms refer to how income is measured when looking at an investment property.  Each of these concepts will be helpful as we dig deeper into investment analysis.  In Part two, different investment ratios are defined and explained.