Opex survey under 40% for low rise ind meter! Accurate?

Question

NAA operating expenses survey Opex survey has garden low rise on individual meter below 40%! Did some expenses get left out of the survey? Any owners out there running below 40%? This does not include cap ex.

Kegan Russell · Answer

Not to be rude, but click on the link and read it.

Some good in depth information there if you read the entire thing.

Jeff Kehl · Answer

@Michael Le I find across my entire portfolio that I end up netting a bit less than 50% of the Gross Potential Rents. That includes paying for Capex and lost rents due to vacancy as well as the operational expenses listed in the study. So generally 40% does make sense to me.

When you say I'm 'not being conservative enough' what are you referring to?

Are there expenses you think are missing in the study?

'vacancy is still not an expense' - ok, but I think you're just making a semantics argument. I'm not sure that helps understand what the financial picture of a multi-family property will look like.

I was trying to help the OP understand why the costs in the study could be 40% when you commonly hear and see expenses listed at 50-60% of gross potential rents.

Michael Le · Answer

What city is that data for? Looks like possibly Los Angeles or Chicago. Because that's not obviously a statistic for the country or even a state.

Kegan Russell · Answer

The average size of the community in the survey is 270 units +-

Michael Le · Answer

@Kegan Russell, where did you get the statistic that the average complex size is 270+? That is not my experience and in Houston at least I know that there are 660k units across 6000 complexes, for an average of around 100 units.

Michael Le · Answer

@Jeff Kehl, I agree that capex should be accounted for (and for the most part I see the opposite of you, as the OMs I see do account for it), but you said the 40% opex number makes sense because the capex and vacancy numbers will take it up to 54%. What I'm saying is that it should already be at the 54% before capex is even considered, otherwise you will underestimate opex. You're not being conservative enough if you're having to move capex above the line just to meet 50%.

And vacancy is still not an expense.

Jeff Kehl · Answer

@Michael Le I'm aware of how the accounting is done but the reality is it's an expense you need to account for. I look at T12s and pro formas for several large apartment complexes each week and it amazes me how that just sort of gets swept under the rug. It needs to be shown as either an on-going expenses or at least a reserve. It's real money that goes out, just in big chunks not in small amounts.

I see syndicators sort of gloss over that fact a lot because they either get that amount financed in the deal or raise it as part of they equity and then plan to exit the property before it becomes a necessary cost again.

Kegan Russell · Answer

Yes, those numbers can be fairly accurate.  You have to remember the average complex size is 270+ units.

Maintenance and other employees are on the payroll and not a "when you need it expense" that would result in a service call on a smaller complex. Some years will be better, some will be worse.  Generally you can save money with scale so always take that with a grain of salt.

Taxes can vary wildly.  Never assume the number they give you, it is almost irrelevant.

Utilities can vary but the marketing and admin costs line up about right.

Insurance will vary but I underwrite 2-3% on the regular.  Its too hard to get an accurate quote unless you simply use the subject property to get some actual rates.

Property management will run 6-12%.

I have another owner survey that matches up with this one give or take 1-2% on each subject line for what that's worth.

V and C is taken off the top line and any capex will be taken off the after tax cash flow.

Michael Le · Answer

@Jeff Kehl, CapEx is not counted as an above the line operating expense. Vacancy would be a reduction of the total income but also not an operating expense.

Jeff Kehl · Answer

If you add the 9% capex and 7%  vacancy that's a total 54% expense which seems about right to me. I pay a lot more in insurance, I usually assume 5% but that is likely just because the average rents listed in that survey are quite a bit higher than the rents I get.