Operating income is a key 🔑 measure of success for a RE 🏨 strategy. It's the net income generated from the operations of a property, and it can make or break your RE strategy.
1️⃣ Rental Income $2,400
2️⃣ Expenses $1,900
3️⃣ Operating Income $500
#Mortgage interest is not included in the calculation of operating income as it relates to capital structure, your operational income should remain same whether you borrowed or invested own money.
A strong operating income means more money in your pocket, while a weak operating income can significantly reduce your profits and valuation.
Strategies to improve Operating income (Core, Core Plus and Value Add)
1️⃣ CORE:
· Core strategy involves buying properties that provide steady, reliable income streams with low volatility ✅
2️⃣ CORE PLUS
· Core plus investing is a strategy that uses debt and equity to acquire properties with higher returns than core investments. It seeks to create value through strategic low cost upgrades ✔
3️⃣ VALUE ADD
Value add Investments involve acquiring, renovating and repositioning properties to increase their value, such as adding amenities or increasing occupancy ☑
In essence, to increase operating income, landlords can increase rental rates⬆, or increase rentable square footage ⬆, or reduce operating expenses ⬇.
Monitoring operating expenses 🔍as a percentage of sales 💯 is a key metric for managing operating income and optimizing resources. This metric allows Asset managers to assess 🤺the financial impact of their decisions and ensure profitability.
Operating income is a key factor in determining a property's value 🈴, often expressed as a Capitalization (CAP) rate %. This rate is calculated by ➗ the purchase price of the property by its operating income, and is a useful way to compare the potential return on investment of different properties ⚔.
In the next post we will cover Cash Income and Cash on Cash return calculations.
