Exploring Net Profit Margin in Commercial Real Estate

By Published On: August 13, 20213.7 min read

The Net Profit Margin, also called Net Margin, Profit Margin or Net Profit Margin Ratio, is the percentage of revenue a company preserves as proceeds after deducting expenses. NPM measures how much net income or profit is made as a percentage of revenue. The ratio of net profits to revenues for a company or business segment is Net Profit Margin. You can find important metrics on your company’s income statement.

Net profit margin is expressed as a percentage or in decimal form. NPM illustrates the percentage of each revenue dollar collected by a company that converts into profit. RealPage analytics supposed it would be exciting to view real estate performance with net profit margins compared to the way commercial lucrativeness is measured.

NPM is a financial ratio used to calculate the percentage of profit an investor gets from their investment: ROI. Real estate has proven to be a profitable industry. Research carried out by Dr. Ed Yardeni, states that net profit margin for the S&P 500 was 7.7% in 2014.

In contrast, the four major kinds of property were in excess, ranging from 15.2% in the administrative sector to 61.7% in retail during the same period. Also, since reporting a catastrophic 2010, industrial has shown unbelievable momentum as longer-term tenancy expirations are being marked to market.

Finally, in relation to net profit margins, retail and apartment performance are outstanding. Over the past 10 years of operational results, the average profit margin is as follows:

Retail – 28.7%

Apartment – 23.7%

Office – 16.5%

Industrial – 10.8%

How to Calculate Net Profit Margin: Formula

The formula for calculating Net Profit Margin is:

Net Profit Margin = Net Profit ⁄ Total Revenue x 100

Net profit is calculated by subtracting all the investment costs from its total revenue. The end result of the profit margin calculation is a percentage.

What Does Net Profit Margin Tell Real Estate Investors?

Net profit margin tells investors if an investment is making enough ROI and whether functioning costs and overhead costs are being contained.

An investor’s profit margin shows how much money the investment is generating, the general health of your investment and problems that camp around your investments. Like the debt-to-equity ratio, net profit margin can help you understand how much leverage you can afford.

Why is Profit Margin Important?

“It is important because it shows how much of every revenue dollar is flowing to the bottom line.” – Ken Wentworth of Wentworth Financial Partners.

Difference between Net Profit Margin and Gross Profit Margin.

Gross margin and net margin are productivity proportions used to assess the financial health of a company or an investment.

Net margin, also known as “net profit margin,” is a metric that measures how much of a company’s net income, or profit, is generated from revenue. Gross margin, which is also known as “gross profit margin,” is a metric that presents a general overview of how competently your business is running.

Drawbacks of Net Profit Margin in Commercial Real Estate

Investors who highlight their profit margin numbers are at risk of conflating long-term growth with short-term gains. Net profit margin can be predisposed by one-off items such as the sale of an asset, which would temporarily boost profits. Net profit margin does not improve on sales or revenue growth, neither does it make available insight as to whether the administration is managing its production costs.

It’s best to utilize several ratios and financial metrics when analyzing a company. Net profit margin is typically used in financial analysis along with gross profit margin and operating profit margin.

An Example of Net Profit Margin in Commercial Real Estate

On investments A and B, the interests were $83.50 and $67.22 in net profit respectively. Both investments have a net profit margin of 18.22%. How much ROI was generated from both investments?

Step 1: Write Out the Formula

Net Profit Margin = Net Profit/Revenue x 100

Revenue = Net Profit/Net Profit Margin

Step 2: Calculate Revenue for Each Investment

Investment A:

Revenue = $83.50 /18.22%= $458.2

Investment B:

Revenue = $67.22 /18.22% = $368.9

Within the Margin of Error

The Net Profit Margin Measurement is basically for a customary reporting period — monthly, quarterly or yearly — and is included in the ROI statement of the reporting body.

The net profit margin is envisioned to be a measure of the overall success of an investment or business. A high net profit margin shows that a business is assessing its products appropriately and is exercising good cost control. It is beneficial for comparing the ROI on an investment or business within the same industry.

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