How do you estimate regular expenses on multifamily properties?

Question

When buying MF (residential and commercial), how do you estimate utility costs, capital expenditures, etc. before you even know the market prices? Or how do you find out the market prices for these different expenditures?

I am interested in learning how to estimate rehab costs, but that's besides what I'm asking about other, regular expenses that occur month after month; not just the one-time fixing/rehab costs?

Ashton Levarek · Answer

@Ben Feder

I'd have to agree with @Scott Passman and Account Closed, we use both of those methods. But in a specific order. When the deal comes in we try to analyze it fairly quickly to see if its even worth the deep dive, the request for info, the calls to local utility companies etc. We basically look at the price, the NOI and the market cap rate, do a little math and get back to the broker or seller. Basically math looks like this

This way we can get our response to the seller quick, avoid wasting time on research, and give them a reason to start providing expense reports, T12 etc. Once they do that we can start really diving into if they are correct, what we can do to decrease them etc.

Long story short, we start with 50% expenses until we have the complete picture. The goal is to be the first ones to start negotiating and working with the seller.

Hope that helps, all the best.

Scott Passman · Answer

For 5+ units, you would want to get a T12 and/or a 2 year history of financials on the property to get an idea of the utility costs and other expenses that go into the property. You want to make sure for utilities you get a full year so you can see the costs for each season. If no such report is available without making an offer, you could also call the utility company/city and ask for information on the building.

Capital expenditures will need to be determined by you and likely an inspector or GC after thoroughly walking the property and evaluating the condition of the building. While you could do a drive-by and try to get a rough assessment on the external condition of the property, the only way to get information on the inside and within the units is to have an accepted offer and during your due diligence. You could always pose as an interested renter and get a look around the building too, not only to see some of the internal conditions but get a feel for how existing property management is handling the property with prospective tenants.

Nicolas Lares · Answer

The most common underwriting error we see on multifamily acquisitions is on estimating future insurance expenses. Buyers use historical premium as a baseline, expect future premiums to stay stable over 10 years, don't account for post-acquisition repricing (many policies reprice at acquisition), and end up with an expense line that's 20–40% higher than modeled in year one. Building in a current market quote and a 10–15% annual buffer is a more defensible approach.

Account Closed · Answer

@Ben Feder a good rule of thumb is 50% expense ratio. On a brand new property it would be less. On an older, poorly maintained, it will be higher. That would include maintenance, taxes, insurance, management, supplies, advertising, etc.

For rehab, you need to contact local contractors and get estimates.

Kyle Mitchell · Answer

@Ben Feder I definitely agree with everyone on getting past financials and using those but I would not just use 50% as a rule of thumb. There are so many other factors to consider (the market, size of the property, master or individually metered, etc), if you do use a 50% rule you may be hurting yourself when analyzing (good or bad). I rely heavily on people in the market you are investing in to help determine a lot of the market expenses, whether that is other investors who invest in the same types of assets or our property management company who manages these assets day in and day out. They can typically tell you what a certain property should be able to run at from an expense standpoint depending on all of the factors I mentioned previously. But the best way to understand it is to continue to underwrite and work with others that understand what you are trying to learn. Repetition, repetition, repetition and you will slowly improve in this area. Best of luck!

Jay Chang · Answer

T-12 is a good reference, but don't rely on it completely. Every region is different, especially insurance, so I don't want to mislead you with what I use for the Los Angeles and Phoenix area. The best way to check is by talking to a local property manager. He or she should know the regular expenses very well, on a per unit basis. Talk to two or three local property managers, so you can cross reference

Good luck!

Gaspare U. · Answer

I must be speculating incorrectly, and most likely too conservative. When I evaluate a deal I will always use costs that they provide for example, taxes, insurance, etc. But I will use a 10% vacancy, 7% Maint and 7% CapEx. I have yet to pull a ratio below 50%. I’m always above, 53% may be the lowest.

I also understand you can’t use the same formular for every property. Some need a gut reno and some need paint. But for decent maintained units perhaps a C or B I will stick with 24% on that trinity. Perhaps the next deal I’m excited about I’ll post it and see what the community feels.

Brad Bellstedt · Answer

In Vegas, when I run the numbers for SFRs (post renovations or no renovation at all) I use 8% Management, (there are a couple here offering 8%) 5% maintenance, 5% Cap-x (4-8 depending on age but usually a 5) and 8% (30 days) for vacancy. The properties here are newer than in most parts of the country, (1950 at the oldest but most are 80's and newer) and our rent rates are relatively high so 5% is typically $65-$80 range, which over the long run adds up to be enough.

A lender friend of mine told me they multiply the purchase price (or ARV if you refinance post-reno) by .0033 for the yearly premium for homeowner's insurance. It seems to be pretty accurate here in Vegas but we don't have hurricanes or floods or termites really so I imagine that's relatively low on a national scale.

Tj Hines · Answer

@Ben Feder a profit and loss statement over the past 3, 6, or 12 months

Ben Feder · Answer

@Tj Hines thank you! What is the T3, T6 and T12?

How do you estimate regular expenses on multifamily properties?

How do you estimate regular expenses on multifamily properties?

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