Underwriting Multi family units
What underwriting rules do u apply when assessing mf complexes? I heard management is 10%, vacancy is 10%, what maintenance percentage, etc?
TIA
#3 House Hacking Contributor
- Real Estate Agent
- Los Angeles, CA
You have to look at your market and go from there. I've typically done 5% for Vacancy, 5% repairs, 5% cap X but it all depends.
Also keep in mind property managers charge an additional fee to find a tenant and even renew.
This is entirely market and deal-dependent. The larger the unit count, the lower the percentages will be, but the higher the expense.
I'd recommend you start underwriting deals in one market and stick to it. You will start to get a general idea of how much your typical expenses per unit will be. Keep a deal sheet and track how many deals you've underwritten, the cost of the deal, location, and notes. This will help provide some credibility to investors if you're looking to raise capital.
I'd also recommend you find a mentor or a coach that will serve as a second pair of eyes when underwriting your deals. Having an unbiased opinion of your deals can make the difference between a good deal and a bad deal, and it's important to remember that, especially heading into times of such uncertainty.
Do you know the actual vacancy numbers in this market? If it's truly 10%, that's a bad sign.
Personally, I do 5% vacancy in my proformas (actual in my market is 1%) and $100/door per month for capex and vacancy and split them in to separate escrow accounts.
Usually no issues with maintenance, but if you are just starting out, you could have some capex issues, so you might get a LOC until you have decent reserves saved up.
Good luck!
#4 Multi-Family and Apartment Investing Contributor
- Cincinnati, OH
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#4 Multi-Family and Apartment Investing Contributor
- Cincinnati, OH
@Anthony Aguillard, as others noted: there is no one size fits all. Management, for instance, is commonly 10% if you are looking at small deals, and can be as low as 2.5% for large deals. But large deals will have payroll as a separate line item.
Vacancy may be 2% or 10% or 5%. The biggest driver of vacancy, in my experience is you or your manager, but also the quality of tenant and availability of contractors. I have never turned a unit that didn't need some work: paint touch ups, deep cleaning, maybe some capex items. If a tenant stays only 12 months, and then it takes a month to fix, clean and get next tenant in, that is 8.33% vacancy. 5% would imply that you are down about 1 month every 2 years. I find in lower end areas, the tenants turn over more frequently.
As for Maintenance and Capex: again it depends on current condition of property, rent level of property, and generally how you want to handle things. But I will remind you, an HVAC replacement is likely going to cost almost the same for a $500/mo area as it will for a $3,000/mo area. So using percentages is irrelevant. I ran a capex calculation that my single family rentals needs AT LEAST $400/mo of Capex reserves to replace everything at the end of its useful life. I new roof will need replaced in 25 yrs. If that roof is going to cost $6,000, you need $20/mo every month for 25 yrs to have $6k saved. Kitchens need redone every 15ish years to keep up stylistically and get top rents. $20k for a full kitchen in my houses (cabinets, counters, backsplash, appliances, flooring, paint, etc): $110/mo. You get the idea. And that is assuming things are new now.
Repairs/maintenance are often directly tied to capex: a new HVAC will likely have lower maintenance costs than old. Appliances are the same, etc. If you have things like deck or fences, often the repair is replacement, so I just lump capex and maintenance together for the most part from a budget standpoint (not for taxes).
Thanks for the information. It’s very nicely put.
@Anthony Aguillard if your market has a 10% vacancy rate that means that it's either taking a long time to find tenants or tenants aren't staying long. You'll never make money under either scenario. I would talk to a property manager in your area and get a true handle on what the vacancy rate is. You'll want to know what the average longevity of a tenant is and how long it takes to replace a tenant when they leave.
@Anthony Aguillard as a few mentioned above, it really depends on not only the market, but the specific property. What size property are you looking at? If larger than 80 units, 3-5% for PM fee, 5% for R&M, 5-7% for vacancy should get you in the ball park.