Net Operating Income

Net Operating Income

One very informative way to evaluate one investment property from another is using the capitalization rate method.  First you will need to calculate the net operating income.

Definition – Net Operating Income is income after deducting for operating expenses but before deducting for income taxes and interest.

Find out where the income is going

First gather all your expenses by calling utility companies for average usage of gas (or heating fuel), electricity and water and sewage fees for the past 12 month period. Check public records for tax information and call local governments for any required license fees. Estimate maintenance of the property (maintenance does not include capital improvements). This is less for newer properties and higher for older properties.  For a brand new home I use 3 to 5% of gross rents and for a 50 year old property that has not been updated and has old fixtures I would use 20% to 25% of gross rents. This percentage will largely depend on your labor costs.  Also, factor a vacancy rate depending on your area which can range between 5%  to 20%.  Don’t forget this vacancy factor should also include loss of rents due to non-collectible rents. The more accurate you are on your expenses the more accurate your net operating income will be.
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Author:  Jerry Minney, Business Development Manager

Performance Property Management


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