Multi-Family Expenses as part of Gross Operating Income

20 Replies


I would like to get an idea of what percentage of the gross income expenses are in a large multi-family property?

I realize this is going to vary, but I would just like to get a ballpark figure.

Thing is, when I'm analyzing a property, the expenses I get from the broker seem low, thus a low cap rate.



@Mario J Perez others have given you great advice. My only suggestion would be to realize that this is market specific. If you talk to a lender, ask what they underwrite deals for in order to fund... that will give you a good pulse on your market.

Hello @Mario J Perez . Both IREM and NAA sell reports on operating income and expenses for apartment buildings. The report is a survey of the industry and they report what the income & expenses are for different types of apartment buildings/markets. When underwriting I suggest you always leave a buffer in your multifamily pro forma for unexpected cost. It would also be a good idea to run a stress test on your assumptions to see how NOI would change if vacancy costs doubled (as an example).

I always recommend to buyers that they break out the real or projected costs when analyzing deals of any kind. Rules of thumb are great if you’re searching for properties and want to know which ones to analyze, but when it comes down to the specifics, there’s no substitute for actually putting the numbers together.

Also, just a word of warning that pro forma is Latin for lie (thanks @David Greene and @Brandon Turner). I’m not sure if brokers don’t know how to put together all the income and expense numbers, or if they intentionally provide incomplete numbers for the benefit of unskilled investors, but you often can’t trust anything provided by a listing broker and you need to do your own due diligence.

You can always find a great property manager and see if you can get average or sample expenses for the type of asset your looking at. They manage properties every day, so they have a pretty good handle on what things cost. Then it’s just a matter of comparing your sample data to the deals you’re analyzing and looking for large discrepancies. Similar assets should have similar expenses. If they don’t, that warrants an explanation.

Hello @Mario J Perez .

For the buffer you add an additional amount over and above your estimated costs. For example lets say after lots of thought you determine your renovation budget is $50,000. Construction being what it is you know that something will go wrong. You may find things you didn't know were broken, a contractor didn't do his/her job or the project will take longer to complete. To make sure Murphy's law does not cause you to go broke you factor in a 15% buffer (or more if the risk is higher) to account for something going wrong. Being the thoughtful investor you are you now budget $57,500 instead of $50,000. This way if your actual cost is higher you increase the chance of meeting your investment goals. If it's lower you increase your expected profit!

A stress test is just the process of taking your assumptions and seeing what happens when you "stress" your pro forma. What will happen if my vacancy rate is higher then the market? What happens if my flip takes 5 extra months to complete? What would happens if interest rates go up by 1% when I go to refinance? Think of the pro forma as a way to model your investment return and the buffer/stress test as your insurance policy to protect your investment return. Starting out I would suggest you pick a buffer that is 20% higher then what you budget.

@Mario J Perez , The rules of thumb provided above are very good for high-level gut checks. However, there's no substitute for actual expense numbers from current operations (at least T12). These numbers give you a much better understanding of that specific property. Even properties adjacent to each other can have vastly different expenses. There may be expenses that you underestimate (using rules of thumb) because there is a unique requirement. You may overestimate and lose out on opportunities resulting in a non-competitive offer (or no offer at all).

Most brokers will provide these financials for any deal up front. It is their (and the owner's) responsibility to provide accurate expense numbers for you to evaluate the deal and make a competitive offer. Your offer should be conditional on the data provided and you should walk away if you learn after due diligence audit that they aren't, thus putting your offer at unacceptable risk.

Having said that, the biggest expense likely to be different is taxes. It's a good idea to know what the millage rate is for the property and adjust the taxes based on your offer since you have little control over tax assessment without lots of costly legal help. I've found this one expense to change the overall expenses substantially in some cases.

@Mario J Perez Normal rule of thumb on larger multifamily's class C&B expect to have at least 50-55% exp ratio to the GPI.  With Class A expect a lower expense ratio, simply because there's not much work or repairs to be done in newer properties.

@Mario J Perez Normal rule of thumb on larger multifamily's class C&B expect to have at least 50-55% exp ratio to the GPI.  With Class A expect a lower expense ratio, simply because there's not much work or repairs to be done in newer properties.

@Mario J Perez

If I self manage with a part time employee rather than a third party company, then I can get 35-40%. That all depends on utility expense.

A lot of states have Exhibits that can be added to the contract to make the receipt of current, accurate financials a contractual obligation and set a deadline for them. I use them all the time when writing for clients, but it's sadly the first time most of them have ever heard about it. A lot of the Agent's around here for MF like to keep the numbers to themselves hoping to double-side all transactions but investors need to be aware that there are ways around that every time. Get those numbers!