Examining a Cash-Flowing Property: GOI, NOI, and Cash Flow Explained

Book: Real Estate by the Numbers | Authors: J Scott and Dave Meyer | Chapter: 4

Previous: The Profit and Loss Statement Explained | Next: How Interest and Compounding Work in Real Estate

Every rental property is a small business.

It generates income. It has expenses. At the end of the day, it either puts money in your pocket or takes it out. Chapter 4 of Real Estate by the Numbers shows you how to run the numbers on that tiny business before you buy it.

The framework is basically the same P&L structure we covered in Chapter 3, but with real estate-specific terminology. Once you learn the terms, the logic is familiar.

The Four Key Numbers

When you analyze a cash-flowing property, you’re trying to figure out four things in sequence:

1. How much income could this property potentially earn? (Gross potential rent)
2. How much income will it actually earn after realistic losses? (Gross Operating Income)
3. How much is left after operating expenses? (Net Operating Income)
4. How much is left after your mortgage and big-ticket repairs? (Cash Flow)

Let’s walk through each one using the example from the book: Catherine, who is considering buying an eight-unit apartment building.

Step 1: Gross Operating Income (GOI)

GOI is the actual income the property expects to collect in a year. Here’s the formula:

GOI = Gross Potential Rent - Rent Loss + Other Income

Gross Potential Rent

Gross potential rent is the maximum income the property could generate if every unit was rented at full market rate all year. No vacancies, no losses.

Gross Potential Rent = Number of Units x Market Rent x 12

For Catherine’s eight-unit building with $1,250/month market rent:

8 x $1,250 x 12 = $120,000

One thing to note: you use market rent, not current rent. If the current tenant is paying $900 but the market rate is $1,000, you use $1,000. You’re analyzing what the property should earn, not what it has earned under previous management.

Rent Loss

Reality check. Not every unit will be rented every month, and not every dollar of rent will actually be collected. The book identifies five common types of rent loss:

1. Vacancy - Units sitting empty between tenants. For single-family rentals, expect turnover every one to two years and some gap time between tenants. For multifamily, not every unit will be occupied at once.

2. Concessions - Move-in specials or incentives to attract tenants. If you offer first month at $99 on a $1,000/month unit, you’re losing $901.

3. Loss to lease - When tenants are paying below market rate. This happens when market rents rise during a lease period or when you renew at a discount to keep a good tenant.

4. Bad debt - Rent that never gets paid because a tenant stops paying, forcing an eviction.

5. Model units - Units used as a leasing office, storage, or free housing for on-site staff.

For Catherine’s building, looking at the seller’s last twelve months of financials: actual rent collected was $108,000 against a potential of $120,000.

Rent loss = $120,000 - $108,000 = $12,000 (10%)

Catherine checked with local property managers who confirmed 9-11% rent loss is typical for similar buildings in the area. So 10% is a reasonable assumption.

Other Income

Other income is everything beyond rent. Common examples:

• Parking fees for covered or reserved spots
• On-site storage lockers
• Laundry machines
• Pet fees
• Late fees
• Application fees

Catherine’s building generates $250/month from the basement laundry and pet fees:

$250 x 12 = $3,000 in other income

Calculating GOI

GOI = $120,000 - $12,000 + $3,000 = $111,000

That’s Catherine’s expected annual income from this property.

Step 2: Operating Expenses

Now subtract what it costs to run the property. These are the ordinary costs of being a landlord.

A typical list for a multifamily property:

• Property taxes
• Insurance
• Property management fees
• Turnover costs (cleaning, minor repairs between tenants)
• Repairs and maintenance
• Utilities (common areas, water if you pay it)
• Lawn care and grounds maintenance
• Snow removal
• Trash removal
• Office/admin costs
• Legal and accounting fees

One tip from the book that’s worth repeating: even if you plan to self-manage, include a property management cost in your analysis. Plans change. People move, get sick, get busy. If the deal only works because you personally are doing all the work for free, it’s a fragile deal.

For Catherine’s eight-unit building:

Step 3: Net Operating Income (NOI)

Subtract operating expenses from GOI:

NOI = Gross Operating Income - Operating Expenses

$111,000 - $40,000 = $71,000

Catherine’s NOI is $71,000.

This is a critical number. And here’s why it matters beyond just Catherine’s deal: commercial real estate is valued based on NOI. Property values for commercial buildings are calculated by dividing NOI by something called a “cap rate.” Understanding NOI puts you halfway to understanding property valuation, which comes later in the book.

Step 4: Cash Flow

NOI is important, but it leaves out two big expenses that come directly out of your pocket: debt service and capital expenses.

Cash Flow = NOI - Debt Service - Capital Expenses

Debt Service

Debt service is just the mortgage payment. Simple concept, fancy term.

When you finance a property, you make monthly principal and interest (P&I) payments to the lender. That total annual payment is your debt service.

Catherine has a $750,000 loan with a monthly payment of $3,350:

$3,350 x 12 = $40,200 annual debt service

Capital Expenses (CapEx)

CapEx covers the big-ticket items that pop up every several years: roof replacement, HVAC systems, plumbing overhauls, electrical upgrades. These are not regular maintenance. They’re expensive, infrequent, and easy to ignore until they blindside you.

Here’s why you can’t ignore them: if you don’t account for CapEx, you’ll think you’re earning more than you are. Say your property earns $2,000/year for twenty years. That’s $40,000 total. But if you need a $12,000 roof replacement every twenty years that you never factored in, your real average annual profit is $1,400, not $2,000. That’s a 30% overestimate of your returns.

The smart approach is to estimate your average annual CapEx cost even if the expense is years away. If a roof costs $12,000 and lasts twenty years, budget $600/year ($12,000 / 20). Set it aside every year. When the roof finally needs replacing, the money is there.

Catherine estimates her average annual CapEx at $5,000.

Calculating Cash Flow

Cash Flow = $71,000 - $40,200 - $5,000 = $25,800

In an average year, Catherine can expect her bank account to grow by about $25,800 pre-tax from owning this property.

Here’s the full P&L pulled together:

One Important Caveat on CapEx

Cash flow of $25,800 looks nice. But the CapEx piece means not every year will feel that good. In most years, Catherine won’t spend $5,000 on CapEx. Those years, cash flow will be higher. But then a furnace dies or a roof needs replacing, and she might spend $15,000-$20,000 in one shot.

By budgeting $5,000/year in her analysis, she’s mentally preparing for that variability and setting aside reserves. Investors who skip this step often feel like they’re doing great right up until a big surprise expense hits.

Putting It All Together

The framework in this chapter follows a simple sequence:

1. Start with what the property could earn (gross potential rent)
2. Adjust for what you’ll actually lose (rent loss and other income)
3. Subtract what it costs to operate (operating expenses) to get NOI
4. Subtract your mortgage (debt service) and big-ticket repairs (CapEx) to get cash flow

That’s the analysis structure for any rental property. Later chapters in the book build on this foundation to cover cap rates, return metrics, and deal comparisons. But this is the core you need to understand first.

If you can build this P&L for a property, you can evaluate a deal. That’s a meaningful skill.

Previous: The Profit and Loss Statement Explained | Next: How Interest and Compounding Work in Real Estate