Annual Net Operating Income is also commonly referred to as Cash Flow. This represents the annual income or loss the investment property actually generates after collecting a year’s worth of rent and paying the annual expenses associated with owning and operating the property. Cash Flow is calculated by subtracting the Annual Total Operating Expenses from the Annual Gross Rental Income.
The formula is: Annual Net Operating Income = Annual Gross Rental Income - Annual Total Operating Expenses
Annual Gross Rental Income - This represents the annual rent you collect on the property. Annual Gross Rental Income is calculated by simply totaling the amount of rent collected per year (12 months) from the tenant occupying the investment property without subtracting any expenses associated with owning and operating the investment property.
Annual Total Operating Expenses - This represents your annual cost to own and maintain the investment property, without taking into consideration any rental income. Simply total all of the expenses that you pay per year (12 months) associated with owning and operating the investment property.
Some of these expenses will include your mortgage payment, insurance, management fees, taxes, HOA fees and any utilities not paid by the renter.
It’s important to note that there are two types of cash flow: Positive and Negative. A positive cash flow is what everyone is looking for. Thats where an your investor generates income beyond the rental income less expenses on an annual basis. A negative cash flow is where there is no income, but a loss after annual operating expenses are deducted from annual rental income.
Not all investment properties will have a positive cash flow and the investor should contact their tax advisor about losses associate with their investment property.
Please feel free to contact TAG Home Management with any questions or concerns regarding Property Management or the acquisition of investment property!
(abbreviated article from: Investorloft.com)