![]() Typically, fees will start at 5% of total revenue on smaller properties and go down to 2.75% of total revenue on larger ones. Management fees are a typical expenditure for multifamily owners, so make sure you understand what you will be paying your property manager each month to operate the property. They should have a great feel for the projected expense load and how you should underwrite a particular building. You could include them in the due diligence process and go through your underwriting line items for each expense to get their honest feedback. This could provide a great opportunity to review operating costs with your property management company of choice. If you are new to commercial real estate investment and are interested in getting an agency loan such as Fannie Mae or Freddie Mac, the lender may require you to partner with an experienced property manager that knows the ins and outs of the business. While I have seen larger, well-managed properties operating as low as a 35% expense ratio, for underwriting purposes, I wouldn’t recommend going any lower than 40%, even in the most optimal of conditions. Location in a high cost of living state.Several factors will keep the expense ratio at or above that 50% benchmark: Older buildings typically come with higher maintenance costs, plus inefficient heating and snow removal during the winter months. Smaller buildings enjoy fewer economies of scale. Start at 50% as your expense benchmark (this excludes capital improvements and other capital expenditures). I would expect a 30-unit garden-style “Class C” apartment building in a cold climate to have a much higher expense ratio than a 250-unit “Class A” high-rise in the south. The number of units, quality of the apartment building, and submarket will all play into where this ratio will likely settle. So, if the total property revenue were $65,000, you could underwrite expenses as $32,500 and feel confident your estimate is reasonable. Assuming you have good historical revenue information, underwriting expenses relatively accurately should be doable regardless of the expense data available.Ī good rule of thumb for a fledgling underwriter is an expense ratio of 50%. When you’re analyzing a property, the owner or broker should provide you with at least a rent roll to build your revenue assumptions. The lower the expense ratio, the higher the net operating income (NOI). The operating expense ratio is defined as the following:Įxpense Ratio = Total Operating Expenses / Total Operating Revenue Let’s talk about some strategies you can integrate to accurately forecast expenses for an apartment investment and feel good about making a competitive acquisition offer. If you don’t have ample experience underwriting properties, this could prove frustrating. You’ll undoubtedly come across investment opportunities where historical financial information is dicey. ![]() I’ve even seen the other end of the spectrum, where expenses are just too low, and no reasonable owner could replicate such efficient operations. But what if this isn’t the case? What if you are dealing with an unsophisticated owner who kept poor records? Or they kept good records but didn’t break out non-recurring items such as capital expenditures, amortization, depreciation, and mortgage interest? Typically, an owner or broker will provide potential buyers with one to two years of profit and loss (P&L) statements. Most of the time, you will have historical financials to work with. As a professional multifamily and commercial real estate analyst, I would recommend a few rules of thumb that you can utilize on your next property analysis. Thankfully, you can incorporate several strategies into your analysis that should get you close to real numbers without profound expertise. Unless you already own multifamily properties or have experience in the industry, underwriting operating expenses can be a monumental challenge for new investors. The following is a guest post from Ike Hoffman, Owner of Tactica RES.
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