¿How do I calculate NOl percentage ?

Question

if my NOl is 15,158 how can i know my percentage??   Bigger pockets says i want a NOl that is between 40% or 50%.

Brian Spohr · Answer

@Jack Edward Johnson Hey Jack, I can answer this for you if you share the gross income. Do you mind sharing the BP resource that discussed this? I’m familiar with looking at expenses as a percent of gross income but not NOI.

Ned Carey · Answer

Account Closed I don't know of a specific percentage to use. Here is how it is done for large commercial properties or HOA associations.

Take the water heater example above. That worked out to $60 a year.  Do the same for every other major component of the property and do the same calculation.  This assumes everything is new.

However lets say the 10 year water heater is 5 years old when you get the property. It usable life is now 5 years. So you need to take the replacement cost and divide it by the number of years left $600/5= $120 a year.  Again do this for every major component. Add that all up and you come up with a total annual cost.

Very few investors would go to this trouble for small properties. In fact very few investors are even aware of what I just described to you.

Ned Carey · Answer

Account Closed's   book

"What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures,"

Ned Carey · Answer

Account Closed yes the two examples you give are correct.

Operating expenses and capital expense are different. An operating expense is an expense you have in the normal day to day operations of a property. A capital expense is cost for capital improvements.

The definition of a capital improvement has some gray area. Generally the IRS considers purchasing something that will last longer than a year or improve the value of a property to be a capital expense. A capital expense is handled differently for tax purposes. There are many details and exceptions in the tax code so I will leave the taxation part for your accountant to explain.  (My accountant doesn't explain it to me. He just puts the numbers in the right place on the tax return tells me how much I owe.)

An easy to understand example is a water heater.  You don't buy a water heater for a property every year. So it is not an operating expense. Lets say that water heater lasts 10 years and it costs $600 installed.  That is a capital expense. Lets take it one step further. In theory that water heater is costing you $60 a year but you only pay it after 10 years.

When looking at your long term costs of running the property, you don't pay that $60 each year, but it is a real cost that you should figure into your returns. You should have reserves put aside for the day when the water heater, or roof, or AC unit etc. needs to be replaced.

Some people figure the costs of capital expenses into their estimated cash flow calculations, some do not. The point is you should at least be aware of these hidden longer term costs, They are accumulating every year and someday the will need to be paid

Ned Carey · Answer

Account Closed in the example above yes the ratio is 79% which is outstanding. That means the property only have 21% operating expenses.  however that example is not a realistic scenario. Notice there are no expenses for repairs or vacancy, both are totally unrealistic.

Anthony Dooley · Answer

Account Closed you divide the NOI (the small number) by the Gross Income (the big number). This is percentage that you are keeping. The difference in 100% is your expenses. Example: if you come up with 60, then you expenses would be 40%.

Ned Carey · Answer

Account Closed said. You are looking for a percentage of your gross income.

If you NOI is 15,158 and your gross income is $100,000 you percentage is 15.158%, If your gross income is $50,000  your percentage is 30.316 %

Ned Carey · Answer

Account Closed higher is better. However I don't know why bigger pockets even mentions it. People talk about expense ratios not profit ratios.  Expense ratio + profit ratio = gross profit.  Basically no one looks at if from the profit ratio side. They consider the expense ratio to see if it is in line with market standards. Good manager look for way to cut costs. Looking at the expense ratio is a good way to measure that.

100%-79% =21%  The profit is 79% and the 21% is the expenses.  As I said almost no one looks at the profit ratio number.  Obviously profits are important but they measure that in other ways like the cap rate or the cash on cash return.

Ellis San Jose · Answer

Percentage of your gross income.  NOI is "net" operating income or Gross Income minus Operating Expenses ( do not include debt payments)

¿How do I calculate NOl percentage ?

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