The gross operating income definition is the total income that a real estate development receives from rentals and services before any costs or expenses are subtracted. Gross operating income (GOI) is a real estate investment term that is determined by subtracting the vacancy and credit losses from the gross potential income of the property. Another term that can be used for gross operating income is effective gross income as it refers to the effective gains of the property without the losses from vacancies.
There is a reason why real estate investors use this evaluation method. It is the single most accessible method to determine a positive or negative cash flow. The gross operating income is, effectively, the amount that goes to the bank from which the investor can afterward spend on capital expenditures.
Before the investor works with the gross operating income, they have to handle the gross potential income (GPI). The work potential there is a clear indication of what it means. A rental real estate building could have 100 units, all rented, making GOI equal to GPI as the rental met its full potential income with a full capacity. The GPI is what a rental property can make if all the units are occupied throughout the year, and the renters pay their rents in full.
Once a real estate investor has the GPI, they need to subtract the losses from vacancies. Here is where the potential drops if the real estate rental is not occupied at full capacity throughout the year. The vacancy loss comes from when the units are not occupied, a period when no rent payments are coming from those units. The credit loss comes from rent payments that did not meet requirements.
As mentioned above, vacancy and credit losses are the two factors that directly influence the difference between GPI and GOI. Both are relatively inevitable, but there are ways through which the gap can be diminished.
Regarding vacancy losses, real estate investors can behave proactively and do as investors do to prevent potential loss. Accelerating the process of occupying vacant units is a good way to start. While there, they can also promote and advertise units constantly. It is easier to say that there are no units available at the time instead of running around to find a renter for a newly vacated unit.
As for credit losses, credit checks are the first thing investors should do. Past landlords can also help out with references that can help an investor assume a lower risk. Avoiding high-risk renters is the best way to limit credit losses.