Most Apartment Buyers (and Sellers) Are Suckers. Here’s How to Be Different.

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I see posts on BiggerPockets all the time advertising deals with low operating costs as percentage of effective income. Folks are smart to recognize that at its core premise, income property is less about the income and more about the cash flow and that as much as anything, this is a function of controlling the operating costs.

Armed with this notion, everyone seemingly tries to make an impression on the community — and perhaps on themselves — by presenting deals with apparent “low” operating costs. As in, wow, see how good this deal is… it only cost 35% to run?!

Let’s chat about this for a minute…

The Way You Underwrite

Let’s say you are analyzing a 100-unit building. You’ve received the OM containing a Pro Forma underwriting and 12 months worth of trailing financials. (In reality you will rarely get the latter, at least not on deals that are worth the paper financials are written on, but let’s have fun, shall we?)

You analyze the data, and you think that you have a good idea of what things cost in this building based on the information at hand. You come up with an NOI, and from there capitalize a value. Furthermore, you think that you can hike rents by like $125/month. All and all, you figure you’ll make out like a bandit…

Realities of Engagement

What’s important to understand is that someone who understands the form and process of the multifamily dance intimately is able to stack the numbers on the page to paint the story any way they want. Truly, you could have 10 people put the numbers for the same exact building on paper, and all 10 will look different and will imply a different story of the position of the asset.

Related: Self-Employed Looking for Credit… What Do Loan Originators/Underwriters Look For?

The Way I Underwrite

With this in mind, my approach to the underwriting process is somewhat different in that my aim is less to underwrite the trailing financials. Instead, I focus on underwriting the numbers that I think are realistic for me, which often diverge from the trailing information presented to me in substantive ways. Why? I used to think it’s because people who prepared the OM were all stupid. And while, to be fair, a lot of them are indeed stupid, many are very smart and understand how to manipulate numbers so as to paint a positive and seemingly reasonable picture.

So, I look at the same building as you. I plug the numbers into my spreadsheet, which has two columns (actually it has more, but let’s just say two). The column on the right is to enter the numbers provided by the Pro Forma, while the column on the left is for my projections of what the numbers are really going to be, which take into account my strategy for the asset.

I enter the information as it appears in the Pro Forma (OM – Offering Memorandum) into my underwriting first. Nine times out of ten, there will be a few line items in this column that remain empty. Not everyone knows how to track all of the moving parts. And as you can imagine, it is not always in everyone’s best interest to track all of the moving parts… just sayin’!

Which is why, having completed the transfer of information from the OM into the left column of my underwriting, I move onto the right column. Based on the information I have, what are the reasonable income and expense figures for an asset such as this?

What Information? The Only Information is the OM, Isn’t It?

Not at all. The OM is the guidance that the seller/broker wants me to have. It may or may not contain any honest to goodness information. The OM is a story, for the most part fictional. I need facts!

For example, while I’d like to know what rents the seller gets, but I NEED to know what rents are reasonable. While I want to know what expenses the seller is paying, I NEED to know what expenses are reasonable for the type of systems that are utilized in the asset.

In other words, if I look at data across 30 communities (5,000 doors) and realize that the payroll expense averages $1,100 – $1,400/door, but the OM schedules $40,000/year for 100 units, am I going to use $40,000 in my underwriting, or am I going to use $110,000+? This happened just last month by the way, and I don’t mind telling you that the OM indicated payroll expense of even less than $40,000/year for a property of over 100 units!

Here’s another example. One thing that almost every OM includes is the property tax expense. This item is so expected and mundane that it’s silly not to include it.

However, most OMs simply include the property tax expense as per the most recent year. Most do not attempt to project this expense past the sale… as if!

Every county in these United States has its own formula for calculating property taxes, and while these formulas vary dramatically in form and style, one thing is the same: they are based on the most recent assessment of property value in some way, shape, or form.

Related: How to Accurately Estimate Expenses on a Rental Property in 3 Easy Steps

The notion that the current year tax bill will survive the sale is just stupid; it almost never does. And yet, I’ve seen people get into deals assuming their tax bill will be $70,000, only to be stuck two years later with a $105,000 bill — happens all the time! This is an instance where the OM is not lying or trying to mislead; it indicates honest to goodness current tax bill on the property. It is the buyer’s responsibility to understand local customs and costs and to anticipate changes, which sometimes happen rather immediately and other times take a few years.

To Conclude

I do not underwrite the income and expenses of specific assets. I underwrite averages. It’s my job to know how much income per square foot to expect. I may be able to outperform, but I am going to be safe and expect to be average. It’s my job to know how much laundry income to expect from “X” number of units. It’s my job to know how much management will cost on the average. I need to know how much contract services run per door on the average.

The thing is, this particular subject property that I am underwriting certainly has some specific efficiencies or inefficiencies relative to the averages. It is those efficiencies/inefficiencies that I must “catch,” as they are the key to placing value on this asset relative to what it is and what it can be.

Are you getting the gist? Do you have questions regarding my underwriting process?

Leave me a comment below, and let’s discuss!

About Author

Ben Leybovich

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at


  1. Amy A.

    This is exactly what I do too! Now that I own a few properties with actual expense numbers, it’s much easier to project what expenses will be. When I first got started, I made a spreadsheet with numbers provided across many local properties to get an idea of what’s reasonable. Now that I have actual numbers from my properties, I can easily see ways to decrease expenses on properties I’m considering, such as by installing an efficient heating system, new fixtures, etc.
    My favorite seller trick is when they have a vacant unit and project the rent will be $200 above market value. They also often tell you that you can raise rents. I had one seller who kept sending me some sheet from HUD and saying that I could raise section 8 rents to those levels. When I asked the local housing office about it, he was off by about $150 per unit per month. Also, if it’s so easy to raise rents, why hasn’t the seller done it by now?
    Sometimes it’s hard not to roll your eyes…
    Thanks for the great article!

  2. Ronnie Sparrow

    You guys have provided great information here. My wife and I currently own investments homes but we do want to progress into multifamily. I have seen some OM on deals that have come my way but its overwhelming to look through 30 pages of information. It almost seems worth it to hire someone to analyze these multifamily deals for you, someone you can trust.

    • Ben Leybovich

      Ronnie – exactly right! It’s not the numbers, but the story behind the numbers. As a syndicator, I look at these OMs all day every day, and in my consulting business I help others make sense of it…

      It’s a never-ending learning process!

  3. Joel Owens

    Ronnie it can be overwhelming.

    That is why another investor or a commercial broker that is also an investor and knows both the ownership and transaction side is a great value.

    You do want to verify the numbers and ask questions so you learn even if getting help. The key is the person protecting your interest instead of trying to make a quick check.

  4. Will Barnard

    Nice article Ben, it is one of those things that is so obvious, yet, time and time again, sellers and list brokers keep trying to have you believe they are painting an exact replica, we know better!
    Would you mind sharing your source for the data on average payroll expenses? I find your numbers to be off from mind. Thanks in advance.

  5. Sean S.

    Ben, I agree that some buyers in the 100 unit or less range are pretty unsophisticated, but I think most buyers who play in large multifamily underwrite the same as you. I don’t know any that actually use the numbers in the OM. We underwrite a ton of multifamily each week and I don’t think I’ve ever really looked at the OM numbers. Our company, for example, owns 9,000 units and we have a pretty good sense of what expenses will be, based on our current assets. We will look at the trailing numbers to understand how the current management is working, but our year 1 numbers are based on our assumptions and understanding of our markets, not the previous sellers.

    I think you tend to underestimate the sophistication of your competition in the large multifamily world.

    • Ben Leybovich

      Sean – I see what I see. We just backed out of 126. The guys bought it distressed for a condo conversion, which really didn’t work! They paid $1 mil – how can you loose? They are loosing their shirts. Guys before them bought it for $2.1- failed. Guys before them bought it for $2.2 – failed.

      People don’t underwrite real costs and real incomes well at all in this space, Sean. Many have money to burn, but that doesn’t mean they underwrite properly…

  6. Ben Leybovich

    Hey, Will!

    I work with a PM who has 10,000+ doors under management nationwide at any given time. This is an arm of a national life insurer, so they own their own assets, 3rd party manage, as well as provide financing…I use their numbers.

    It is possible on some projects to get closer to $1,000 – $1,050. If, for instance, the project is more or less stable, now days it’s possible to outsource the leasing function to 3rd party, which cuts down pay roll expenses. But, by and large, I would not be comfortable running 100 units on anything much less than $1,100 – $1,200 of pay roll.

    And these are easy to break down:
    Manager 130% of $38,000 + or –
    HVAC 130% of $38,000 + or –
    Part to full time maintenance: hourly plus fica

    That’ll take you to about $130,000 ($1,100 x 120 doors)in a hurry and up from there based on systems and number of units. And for smaller buildings, because of the inefficiencies, the price/door is actually higher. So on 100 unit you’re looking at roughly $1,200+ since it still basically requires the same personnel as 120…

    Thoughts, Will?

    • Will Barnard

      Thanks for the response Ben. You have lumped in there HVAC which I and many others would consider contract services or perhaps placed into repairs and maintenance, not payroll. On a 100 unit complex, there is no way you need a full time employee working strictly on HVAC units. If you do, you have bigger problems!
      With your format, why not have pool maintenance and landscaper on payroll too!

      For me, payroll only goes to on site property manager/lease agent (one in the same on only 100 units, larger complexes would need two people or more depending on size) and on site maintenance person. Anybody else is paid as a subcontractor and not an actual employee of the business.

        • Will Barnard

          I understand what a certified HVAC guy is, my brother is one. My point is, you don’t need one on payroll part or full time on a 100 unit apartment building, there would not ever be enough work to support it. In hundreds of apartments of this size I have looked at and analyzed, not one had such a person on payroll.

          This line item is contract services, not payroll, that is my point and likely why you have an abnormally high payroll amount per door on 100 unit buildings in your post.

      • Ben Leybovich

        Will – so what maintenance staff do you underwrite for 100 units? Certainly you need 1 full-time maintenance guy, even in the most stable situation. Why not let him be HVAC certified to drive down that contract services? I am sure, as well, that 1 person will find it difficult to run repairs on all 100 units…

        I underwrite 1.5 employees for 80-100 door, and I prefer for the full-time to be HVAC certified. Thoughts?

        • Brendan Kelly

          Ben – I work in the appraisal space and we find that it’s reasonable/typical for properties to have 1 full time employee per 50 units, similar to what you use. For a 100-unit building, it’s typical for properties to employ a full time manager and full time maintenance tech. With that said, we see fluctuations in wages between major urban markets and rural markets. I think it also depends on the tenancy (family vs senior) and type (market rate, section 8, etc) of property.

          We try to obtain local comparable expenses to see what’s commonplace but this difficult to find for obvious reasons.

      • Brian Burke

        Interesting debate gentlemen. I agree with some, disagree with some (yeah, I know, who cares what I think? LOL). Oh well, here goes anyway FWIW.

        I agree with Will that you don’t need an HVAC certified lead maintenance. It sure the heck is nice to have though. But not always feasible. I had one at my 60 unit building for a few years. The good part was that I never had to call an HVAC contractor, we handled it all in-house. The bad part was that I was paying about $2 or $3/hour more than “market” for this guy…but man he was good. One of the best maintenance guys I’ve had. Eventually I couldn’t afford it anymore so we replaced him and his replacement wasn’t certified. The good news is my management company just moved him to a larger property so when we needed his skill we could “borrow” him–best of both worlds. I have certified guys at my larger properties but I can afford them there.

        I disagree with Will that hiring an HVAC contractor for a repair job is categorized as contract services. It’s actually contract labor, which falls into the repairs and maintenance category. Contract services is only for recurring contracts that happen monthly or quarterly such as landscape maintenance, trash removal, security patrol, recurring pest control, etc. At the end of the day this is just semantics because as long as you consistently apply the various expenses it all works out…but if you are comparing your projections to industry averages a miscategorization will throw you off. That’s the main reason why I’m pointing it out.

        I also disagree with Ben, but just for the pure sport of it (just kiddin’). I don’t think you need 1.5 maintenance for 80-100 units. I have 1.5 at a 140 unit and it works fine. Ben’s number is right if you are doing unit upgrades for a repositioning but once stabilized it’s probably too much unless the property is really old and generates a lot of repair tickets. He’s probably spot-on if there is heavy turnover though.

        As to underwriting payroll, I use 1,000 to 1,300/door and there are a lot of variables in how I come up with that such as age of the property, unit count (because of economies of scale), turnover rate, and property class (class A tenants expect a higher level of service and class D tenants require a higher level of “attention” and B & C are in between).

        Sometimes I see people underwrite to $800/unit for payroll–more power to them if they can pull it off, but I’ve never had a property run that low. Funny thing is those seem to always be the distressed properties. Coincidence?

        • Ben Leybovich

          Haha – Well – Burke has spoken. That sure as hell settles it…

          In other words, I am right if the property is in Ohio, Indiana, Ketucky, or Michigan, where doors are generally older and economics are generally poorer. And I am wrong if the property is a 1986 Houston with oil and gas rents – makes sense…

          Thanks, Brian!

        • Will Barnard

          ,Brian, yes it is semantics but my point and argument was to properly classify expenses so thanks for pointing out my mislabeling of contract services when it should be contract labor under R&M.

          Ben, for 100 units, I have found that one maintenance guy is more than adequate and can include the simple preventative maintenance on HVAC line changing out filters and checking for freon leaks. Saving on HVAC contractor may help, but I bet having to pay your certified employee more per hour for all the other tasks would negate any savings.

  7. The article looks interesting but I get tripped up by acronyms I don’t know (and can’t find the definition of online). What does “OM” stand for in this context?

  8. jason mak

    Ben – I like how you bolded the line “are realistic for me”. That’s certainly true and can also help you underwrite to a HIGHER price. If you are a more skilled and experienced investor and believe that you can realistically run even lower expenses (or higher revenue), this will enable you to underwrite a higher offer price than your competition’s, enabling you to win the deal over other bidders. It works both ways, to underwrite the price both up and down.

  9. Jason Brenizer

    Second time I read this blog post. Ben, your style is as entertaining as your analysis is deep. And thanks to Brian, Brendan, and Will for contributing to the conversation. I currently only invest in single family homes, but I’m educating myself for the leap to apartment (and mobile home park) investing. I appreciate that you all take time to share your knowledge.

  10. Brandon L.

    The conversation that this article sparked, is just as educational as your writing Ben.

    At what point in your investing career did you start underwriting properties in this manner?

    What is your radius for the 30 communities (5000 doors) that you pull info on, in relation to the subject property.

    Lastly, does the Cash flow University contain your underwriting spreadsheets 🙂

    • Ben Leybovich


      1. The small multi world doesn’t quite work this way. This is for big stuff.
      2. Numbers are national, and they basically are the same everywhere. Buildings vary, averages do not.
      3. The basics of the methodology are in CFFU. The specifics pertaining to large acquisitions – not a chance. That’d be akin to teaching you to fly before you learn to crawl… 🙂 I don’t have that much time, nor do I want to charge you $30,000…lol

  11. Brandon L.

    A bird never thinks about crawling, they are just patient, learn as much as possible by watching, and wait for the perfect time to fly. 🙂

    My apologies, I assumed we were talking about small stuff since you used a 100 unit building as your example.

    I too thought this was large up until a few weeks ago when my property manager friend said she would love to manage a complex that small. ( I was speaking to her about 140 unit complex) Which surprised me, and led to a lot of questions, and her answers changed my perspective on what constitutes a large property.

    Another question I asked was about the staff a property of that size could support, and her answers were in line with Brian, and Will.

    Hope you have an amazing day Ben, I love reading your stuff 🙂

  12. Jason Mittenzwey

    As a newbie this was very helpful. I’ve placed my focus on small apartment buildings and after viewing several and reviewing the owners “pro formas” my numbers always workout to be a little higher as for cost. As a beginner I know calling around utility companies and property management companies allows for great comparisons but is there an accurate way to estimate the increase in taxes? Love your stuff Ben!

    • Kent Stauffer

      Jason – you can try looking up the tax rates on your county website. In my area you can get the rate per $1000 assessed value for city, town, and schoool taxes. Then if the purchase price is higher then the current assessed value, use that amount multiplied by the tax rates.

      This got me on my first deal. I purchased at duplex for $180K and the assessed value was $144K. I used the current taxes in my proforma, oops! Went from a good deal to an below average deal as soon as the first tax bill came.

      Now I don’t use any numbers from the seller marketing. I only find out current rents and what is included in the rents. I have a good idea now of the averages in my area for utilities, lawn, snow, etc. to include in my proforma.

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