Net Income

Net Income includes the total earnings of an individual or business after taxes and business expenses have been deducted. Real estate investments are made by individuals or corporations and can add to one’s Net Income through cash flow paid in the form of tenant rent. The difference in calculating Net Income includes taxes paid by corporations and owner distributions. Net Income for a corporation includes taxes paid, however, Net Income for a direct investor is the taxable amount and the deduction of depreciation as a non-cash expense. In most cases net cash is typically more than Net Income. The income statements on larger investment properties start with the total gross income that the property would generate with full occupancy at the stated rent rate. Vacancies and discounts that are offered to entice tenants to sign longer term agreements are the deductions from total potential income. Operational expenses include repairs, salaries, municipal taxes, utilities, and depreciation, all of which are subtracted from gross income. Interest paid on loans and owner distributions reduce income from operations to calculate pre tax income. (This is sometimes referred to as pretax margin or pre tax profit). On a corporate statement, profit is determined after income tax contrary to an individual investor whose interest payments are an expense subtracted from operational income to calculate Net Income. Owner payments are not considered since all Net Income is added to the individual’s annual income for tax reporting purposes. An investor should possess the knowledge and skills necessary to analyze income statements, since a property owned by a corporation may become a viable individual investment opportunity.