The secret to making money from rental investments is knowing how profitable a possible investment property is and how much positive cash flow it is likely to produce. That’s why operating income is among the most important factors to consider. However, it’s important to keep in mind that although running a rental property generates several income sources, not all of them are classified as operational income. In this case, rental income is at issue.
Rental income pays for expenses, maintains properties, and provides owners with returns. The question remains, though, how much rental income constitutes operating income. Read on as this article addresses this question, explains what counts as rental and operating income, and provides other valuable details.
What is Operating Income?
The money your rental makes after regular expenses is known as operating income. It serves as a key indicator of the profitability of revenue-generating properties. It shows the amount of money a property makes after deducting all required operational costs. Investors can evaluate and contrast various real estate assets using operating income, a defined measure of profitability. It starts with Effective Gross Income, which is rent plus fees less vacancy loss and credit losses, then subtracts operating expenses.
Operating income is important to investors for several reasons. The first benefit is that it helps assess a property’s profitability and financial performance. A high NOI in real estate indicates a profitable property, which is why landlords need accurate rent tracking and expense management. Then it becomes easier to compare potential investment opportunities. This income is also essential for securing financing, as lenders use operating income to assess a property’s ability to repay debt, and, most importantly, it helps investors make data-driven decisions when purchasing, selling, or refinancing properties.
What Counts as Rental Income?
The money a landlord or property owner receives by renting out their space is known as rental income. It usually refers to the monthly rent tenants pay, but it can also include additional rental-related income streams. With guidance from Bay Property Management Group San Antonio, landlords can maximize profitability while minimizing vacancies in their rental property.
Although most rental income comes from monthly tenant rents, there are many other types of income that management will need to monitor. There are late fees for tenants who fail to meet their rental payment due dates, as well as nonrefundable application fees collected during the screening process. There are also pet fees or rent, which are either a recurring monthly charge per pet or a one-time fee.
Other charges may include parking or storage fees, depending on whether you have a reserved parking space or a storage unit. Then, there’s utility reimbursement when tenants pay for utilities they share with others. Rental income also comes from laundry or vending, which are usually coin-operated machines or on-site amenities. There are also short-term premiums, which are higher rates charged for short-term or furnished rentals.
Is Rental Income Considered Operating Income?
Rental income by itself does not qualify as operating income. Rather, it is an essential element of “gross operating income” from all sources generated from an apartment building, which is reduced by “operating expenses”. This results in a “net operating income (NOI),” which is the true indicator of the apartment building’s profitability as an ongoing entity. However, if renting property is one of the company’s main business operations, rent earned may be treated as operating income. If not, it is usually categorized as non-operating income.
Rental income includes all money collected by the landlord, such as rent and fees for laundry and parking, and is usually calculated on an effective basis after deducting vacancies to arrive at the effective gross rent. Operating Income, on the other hand, is simply rental income minus the day-to-day costs of running the property, such as electric, gas, water, insurance, property taxes, REM management fees, and all other operating expenses, but excludes any expenses related to debt service or capital costs.
As an investor, you can use operating income to assess property performance because it separates a property’s operational efficiency from its financing. For example, $100,000 in rental income minus $40,000 in expenses yields $60,000 in operating income, not the gross rental income.
The Role of Property Managers in Accurate Income Tracking
For investors to precisely track their operations and rental income, rental property managers are essential. They start by locating qualified tenants, which is important for maintaining consistent rental income. From promoting the property to screening applications and executing lease agreements, property managers handle every step of the tenant placement process. By doing this, they reduce the risk of late payments, which can affect the tracking of rental income.
Property managers also keep track of their revenue sources, including rent, late fees, parking, and laundry, as well as their goodwill expenses, such as maintenance and utilities. They also automate rent collection to reduce delinquency rates and provide the owner with accurate financial reports. These reports include rent collecting data, maintenance expenditures, and other financial parameters crucial to evaluate your property’s success. This also helps investors calculate net operating income by reducing vacancy rates and controlling expenses, thereby increasing profitability through data-driven decisions.
Final Thoughts
Regardless of your level of expertise as an investor, the profitability of your rental homes and your entire rental house business will depend on your ability to comprehend and calculate operational income. When you have organized your income into parts and what’s not, it becomes easier to deduce the other measures you can use to provide an overview of the performance of a rental property.
Also, remember that maintaining the profitability of your properties requires effective property management. Property managers can monitor rental income, pinpoint areas for cost reduction, and ensure financial records comply with tax regulations with the help of accurate accounting. Additionally, adherence to accurate income tracking makes it easier to prepare for audits and attract potential investors.
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