Margin Per Apartment in Multi?

Question

Hi BP, has anyone tracked their margin per apartment?  I've got some numbers from it and most are good but I'm not really sure what to compare it too.  Is 25% per apartment good, 50%, 15%?

Spencer Gray · Answer

We look at it as an income/expense ratio, or expense / income ratio. The baseline is the 50% rule which states that as a very general rule your expenses will be 50% of your revenue. This number varies depending on economies of scale, vintage, property condition, etc. It's not uncommon for professional operators to be in the 35-40% range. But that is really only one part of the story and doesn't paint a very clear view of the project, but it is worth tracking on your model.

Speaking of which, you have a few line items out of order on your spreadsheet and a few key ones missing. For example, and maybe you are using gross totals, but you should start with a "Gross Potential Rent" (GPR) and then then deduct physical vacancy, loss to lease, bad debt, and concessions and then sum to GRP for "Net Rental Income," add "other income" from fees etc to create your net revenue.

Then add up all your expenses, excluding cap ex and debt service but including property taxes, payroll, contract services and property management fee.

Deduct expenses from net revenue and that will give you your NOI.

Now deduct cap ex, reserves and debt service to give you your "Cash Flow" after debt service. Take the nominal amount of cash flow, divide by the equity in the project to give you your cash on cash return.

Evan Polaski · Answer

@Stephen Torti, sounds like you are describing expense ratio, which is a very common metric monitored.  Most groups don't break it down by unit, but you could.  Let's say you own a 100 unit complex, you would typically look at the overall operating expenses divided by revenue.

You can go a step further to include debt service, fees, Capex reserves, etc to see your cash flow to revenue ratio.

Another common metric is Capex to increased revenue.  I.e. if you spend $1mm in upgrades, what is your ROI on those dollars.

You could break this down by unit, but it typically won't give you much valuable information.  It could show units that need renovation to help mitigate ongoing repair expenses.  It could flesh out tenants that are particularly hard on units, if same tenant continually has repair requests.

Joshua McIntire · Answer

There is a trade magazine called “Units” that does an analysis of ratios they gather from over 3,000 surveyed properties around the country and break it out into garden style and multi level.  The projects surveyed are large complexes and I have yet to find a reliable benchmark for ratios on apartment buildings under 80 units.

Percy N. · Answer

@Stephen Torti for commercial RE, try to figure out the Cap Rate as that metric is more common.

Ned Carey · Answer

@Stephen Torti You probably won't get many answers here for that.  It is just not a common metric for measuring Performance. The problem is; how a property is financed will make a tremendous difference in that percentage.

It also has virtually nothing to do with more important metrics like cash on cash return or Internal Rate of Return (IRR).

What is the reason for wanting to know this? Do you want a way to evaluate potential deals, or perhaps you want a way to measure how well you are managing the properties? Let us know why you want the information and we may be able to give you a more common metric to use.

Stephen Torti · Answer

Awesome, thanks @Joshua McIntire.  good tip

Ned Carey · Answer

@Stephen Torti Some numbers to look at would be your expense ratio as mentioned. This can give you an idea of how efficiently your are running your properties.

Another number I like is debt coverage ratio. How much is your Net Operating Income (expenses other than Principal and interest) divided by the P&I payment.  This is a measure of your risk of borrowing.

If you like numbers there are lots of numbers used to evaluate deals. CCIM training, Ray Alcorn's "Dealmakers Guide" and Brian Burks book on investing in syndications published by BP and available form the bookstore menu above will give you some other ideas of numbers to track.

Stephen Torti · Answer

More curiosity than anything else, sometimes like to just play with numbers.  thank you though.

Stephen Torti · Answer

Dividing all expenses by the number of units and coming up with profit and the dividing that by revenue for that apartment. 25% would mean a quarter of the rent they pay for their apartment is profit before income taxes

Ned Carey · Answer

@Stephen Torti what do you  mean by "Margin"?

Margin Per Apartment in Multi?

Most Popular Reply