Net Operating Expenses

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What do you qualify as net operating income? I've been using the Property Analysis Tool and removed all of my property expenses - taxes, mortgage, insurance, water, advertising, and some other small expenses directly from the rental income profits. I don't really consider that "net operating income". But some people said to take out 45-50% for "net operating income" (out of the income profits) but didn't explain if that is what it is for (advertising, utilities, etc.).

So, what do you consider net operating income?

[Craig L.]

I can see both sides of this argument over whether it is accurate and/or useful to use 45-50% of gross rents as a an expense estimator. On any SINGLE PROPERTY your actual expenses could be very small or could be significantly more than the 50% of gross rents figure.

The thing is, you could be getting positive cashflow on 9 out of the 10 houses you bought using a house-to-house individual expense formula and still be bleeding money on your total investments because of that 10th house. For each and every property you analyze to purchase, you have to account for ALL of your other properties. By treating the expenses of your properties as a whole you prevent cashflow catastrophes from happening. You can take it in stride when your tenant trashes one of your houses because you had accounted for that bad egg by spreading the expense over all your properties.

And when your tenants all behave and have extended stays in your houses you are pleasantly surprised. Under-calculating your expenses is as dangerous as purchasing on the basis of speculative on price appreciation.