BiggerPockets

When I find a promising multi-unit rental property, I usually assume that 50% of the gross rents is what I'll have after operating expenses to pay my mortgage. The listing sheets have a breakdown of the operating expenses; should I go by what they have or assume it's 50%? I don't want to overestimate the expenses too much.

Thanks, Rehab. Does that 50% estimate include property management? I haven't been including it in my number-running. I've been subtracting 15% of the gross income to allow for a property management company.

50% does include all typical expenses, I would include property management in the 50%

SWEET!

Taxes and insurance would be included. Your mortgage payment would not be.

8)

It always baffles me to see someone with CCIM or some other high-brow designation after their name passing off some crapola underwriting example for a complex. These people should be immediately stripped of their designation IMO. I am all for them working on the behalf of their clients and trying to get top dollar for the asset, but outright bsing on the financials is borderline fraudulent in my book.

In which case, it's fun to ask, "Are you lying to me on the pro-forma or are you cheating on your tax returns?"

Going in you want to expect the worst and use this to negotiate a lower price. After taking over - increase your income and reduce the expenses and turn it into the proverbial "cash cow".

DSCR is the debt service ratio which is equal to

annual net income divided by annual debt service cost

This is important to know the higher that number is the greater the cushion that is built in the property. Most commercial lenders require at least 1.25. Personally 1.25 is tighter than I want to be on a commercial deal.

@Mike

Do you intentionally try to pick fights with everyone? It is nice to get a lecture once in a while, but I have been underwriting HUNDREDS of real estate transactions for a very long time buddy....as have my mentors with 35+ years of experience. Just because you buy broken down dilapidated buildings in Sticksville doesn't make your underwriting "THE way to do it." I see you on here castigating people for a divergent viewpoint.

45% plus or minus 2% is THE number verified by THE INSTITUTE OF REAL ESTATE MANAGEMENT AND (!!!!) THE NATIONAL APARTMENT ASSOCIATION. Are you claiming to have better data than those guys buddy?! I can provide links if you need them.

Please leave the political diatribe to the politicians too. Property taxes are used to confiscate wealth to pay for items where there are laws that MANDATE balanced budgets. If you want to throw stones throw them at the Feds who have a wreckless agenda.

Whatever you do please do more listening (watching) and less preaching. There are other smart people in the world too that don't share all of your OPINIONS masquerading as FACTS.

QED

I was evaluating some apartment complexes (200+ units) last year in Texas and Florida and found that their expenses were around 55% to 60%. I am not sure if they were particularly poorly managed as I did not end up buying them. The ones in Texas may also have had higher expenses due to the higher property taxes there.

In any event, I think assuming 45% (or 50%) without doing your due diligence on the specific property can be dangerous.