Net operating income, in terms of a real estate investment, is the gross scheduled income, plus any other income, MINUS a vacancy allowance, and MINUS operating expenses. The net operating income can be used to calculate the capitalization rate or CAP rate, which is a commonly used metric to determine the quality of a potential real estate investment.
If the CAP rate is the same or less than the savings interest rate at a bank, pick a different property, or put your money in the bank…. it has less risk.
Now here is an example of these calculations. We will use a sample property priced at $100,000, Gross Scheduled Income of $10,000, Other Income of $1,000, a 10% vacancy allowance, and $5,000 operating expenses.
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