Hello BP, I am looking to 1031 a few properties that I currently own in Redding, CA and roll them into a larger investment with better cash flows. In short I have sort of house hacked a 4 plex and an SFR and would like to now sell and collect my appreciation to put down on a larger multi-unit apartment complex or Mobile home park. I'm looking to purchase in the $900,000 or less price range and i'm looking for 30+ unit apartments as well as a few mobile home parks and RV parks that seem to be in the 50+ sites range.
My question is this - I've been putting together my #'s to forecast income and expenses, but I'm not sure what kind of expenses to accurately project my management costs (assuming I'm not living in proximity to property and not managing myself), as well as estimating a monthly maintenance costs. I thought about allocating $75/unit in monthly repair costs which at first seemed a little high to me but may avg. out to be a good #?
Any feedback here would be appreciated (as well as pointing out other costs that I might not forsee). Right now i'm accounting for debt service, Taxes, and Insurance (although i'd be curious to hear more educated opinions of what a reasonable insurance est. would be on a 30+ unit complex). I still need to come up with decent estimates for grounds maint. , paid staff / mgmt. , monthly / annual repair budget. ??
Thanks in advance!
Hi Rodney, I'm doing something similar so happy to share notes.
Here are my major expense lines:
- Cleaning and Maintenance
- Repairs (minor)
- Depreciation (this is noncash but goes into Sch E)
- Capital Reserves (depending on quality of building, I put this at +/- $1,000 per year per unit
As a gut-check, these expenses should be ~50-60% of revenues. I do not have a MF yet, but this is how I'm modelling the numbers.
Hope that helps!
50-60% of revenue is about right on a building with utilities the major variable. On a MHP 30-40%.
For Multifamily, here is how I break down my underwriting pro-forma and the expense cost rules of thumb I use:
+Gross Potential Rents (Market Rate x Units x 12 months)
- Concessions (depends on the market, but I try to limit to 3% GPR)
- Economic Vacancy (physical vacancy + bad debt + loss to lease)
= Total Rental Income
+ Utility Income (based on past RUBs history or the per door flat fees)
+ Other Income Items (Laundry, revenue share contracts, late fees, app fees, etc.)
= Total Income
+ RE Taxes (usually use 3% increase over last tax bill, but make sure your area won't reassess immediately upon the sale at the new price, which could drastically increase the taxes)
+ Insurance (my rate is about $200/door....yours will be different, talk to your agent)
+ Management Fee (3-5% depending on size and company used)
+ Administrative costs ($150/door)
+ Payroll ($900/door, but the smaller the complex, the higher this cost usually goes)
+ Marketing ($125/door, again it depends on the property size and market)
+ Utilities (usually do a 3-4% increase over the past 12 month total)
+ Repairs/Turns/Contract Services/any maintenance (depends on the age, I buy late 60's to early 70's vintage stuff and usually spend $750-800/unit....this goes down as the property is newer or renovated)
+ Reserves (this will depend on your financing, but I place it above the NOI line here because if the bank requires it, it is an upfront expense monthly....usually $250-350/door)
= Total Expenses
NOI = Total Income - Total Expenses
This generally works well for properties 20+, but might not work so well for smaller complexes. Hopefully this answers your questions on how to look at your expenses.
I agree with Mike's process by projecting costs/unit. Applying a percentage does not work well as income and expenses vary greatly.
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