Real Estate Agent · Cheyenne, WY · Member since 2009 · 205 posts · 51 votes
When you go beyond the 50% rule and start trying to estimate expenses in more detail, what do you use to estimate maintenance and repairs for an apartment building of say, 20 units? I know there will be a big difference between a building that was built within the last 5-10 years and an older one. I'm looking at one that was built in 1977 but has had a new roof, new windows, exterior paint, and a few interior improvements within the last 5 years. For my 1951 duplex, I use 20% of the rent as my estimate. It's been much less than that, but I haven't had to replace a roof or paint the exterior yet, so I figure it will average out to be about right. For a 20-unit building, shouldn't it be lower due to economies of scale? Changing the estimate from 20% to 15% improves my cash flow by $700/month!
Houston, TX · Member since 2008 · 79 posts · 24 votes
17y
Mariah,
My typical rule of thumb for expenses for 2-20 Units are 30-40% of income. Anything above 20 I will use the 50% rule. As an investor I would recommend that you use these numbers for conservative investing. Many investors get caught in bad situations when they try to make the numbers fit the property instead of making the property fit the numbers.
If you could purchase a 20 unit building and your expenses are less than 30-40% then thats an advantage to you, but what if you buy the property and the expenses exceed your prediction of 15%(which is just about unheard of) then where's the benefit to you. Bigger property, bigger expenses. Running your numbers with worse case scenerio will keep you away from purchasing future problems.
Commercial Real Estate Broker · Nashville, TN · Member since 2008 · 151 posts · 46 votes
17y
While you will benefit from economies of scale for bigger items like a roof, you don't gain in the individual units.
For instance, a 10 unit mf building, garden style, will have roughly the same size roof as a two story 20 unit property with the same footprint. The roof will need to be replaced at the same time for both properties, but you can amortize the cost over more units. Same amount of money, but on a per unit basis, the cost is lower.
To more precisely answer your question though, I've never bought a property in which i did not have a full rent roll and historical expense statement. That's not to say my expenses didn't go up on once i bought them, but it helped me do a more thorough analysis.
For my analysis, I use a minimum of $250/unit per year on my properties with 10 units or more. Unless, the historical expense statement would indicate otherwise.
If this is your first MF purchase i wouldn't mess with a 20 unit if the seller or seller's agent is unwilling to turn over their data. it's not worth the trouble in my opinion. A $700 additional cash flow could turn into a $700 deficit when you start uncovering those skeletons.