Underwriting apartment expenses - small properties vs. big ones

[Nick B.]

Hello BP!

Are expenses per unit significantly different in small apartments (10-50 units) versus large ones (100+ units)?

I came across a couple of listings for small apartments (16 and 36 units), where stated actual expenses were much lower than those I see on bigger properties. 

E.g. for one of the properties expenses were $3396/unit/year (not counting reserves) but when I applied a typical expense breakdown that I use for 100+ units I came up with $5034 (including $300/unit reserves).

Of course, with that much of a difference neither of these properties make sense at the asking price even if I take broker-suggested potential rent growth at the face value.

But maybe I am missing something... Does it cost less per unit to operate a 36 units vs. 200 units on a similar class/age property?

I am tagging a few BP sages to share their wisdom:

@Ben Leybovich, @Brian Burke,  @Tom Lafferty, @Brian Adams

Thank you
Nick

[Brian Burke]

I think that one big reason that you see lower expenses on small properties is that the owners of small properties have a greater tendency to self-manage and to skimp on maintenance. It's also not uncommon to see them share expenses amongst other businesses and conceal expenses in the income statements of other properties that they own.  Then you see the ones where the brother does the maintenance, niece runs the office, etc...

Your costs would be higher than the seller's unless you are buying a job. Assuming that you run the small property in the same manner as a large one, I'd expect to see your per-unit cost to be higher on a smaller property. There are enough items that are a fixed cost and fewer units for which to amortize those costs, plus less economy of scale. 

That said, it's hard to ever see a direct comparison because every property is different. More landscaping can cause higher water expenses and maintenance costs, a different city can have different water, sewer, and trash hauling rates, pay scales can differ from region to region, property taxes vary widely, and so on.

To sort all of that out, I use data from the property's historical costs for utilities and contract services, tax assessor data to estimate post-acquisition property taxes, and my own operational experience to estimate payroll, insurance, R&M, CapX, admin costs, marketing, etc.