Multifamily Operating Costs

Developer · Boise ID · Member since 2016 · 287 posts · 110 votes

6y

@John Johnson I think 30% is shooting for the moon a bit. For new construction deals I generally am finding for multifamily (California and Arizona) your operating expenses being closer to 40%

This may be a bit different for these tiny homes which I don’t know much about but I feel 30% is aggressive.

Have you spoken to any PM groups to get their input on what they are seeing in your market? That would be a good way to get a pretty solid number

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Greg Dickerson

Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes

6y

Originally posted by @John Johnson:

I am starting to budget out and model some potential projects for MF developments. Is there a rule of thumb for operating expenses for MF in the los angeles area? My old AM firm always looked at 30% of EGI - after vacancy of 5-10% (Stabilized). I am curious if there are other developers that have other methods or historical price points for % of gross sales new construction MF units will run.

Also we are building tiny units so this would account for more units vs traditional building size and square footage. I was looking at 20 units MF building collecting about 1000 a month per unit. Ultimately white paper wise:

$1,000 x 20 Units x 12 Mo's = $240,000 per annum

5% vacancy = ($12,000)

EGI = $228,000

OPEX @ 25% = ($57,000)

Operating Income = $171,000

Reserves @ 5% of OI = ($8,550)

NOI = $162,450

Would this be feasible or am I dreaming? I like to believe 50% Opex would be the most conservative way but then most projects wont pencil ...

Any input is appreciated, thanks.

A lot depends on the location, size, style and amenities of the property. Some areas of the country are more expensive to operate than others. Some types of construction require more regular maintenance than others etc. The best thing to do is verify costs expectations and projections with a management company that operates similar product in the area. I would hedge on the conservative side which would be 50% just for feasibility purposes. Also I would count on 10% vacancy as well right now.

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Bobby Larsen

Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes

6y

Broadly, I’d say it ranges from 35-50% for properties in the western United States. 35% being a 2000 or newer, garden-style property with rent greater than $1,300/~$1.25sqft. 50% being older properties with small units and rents less than $1,000/~$1.25sqft. If there are elevators, add another 5%.

In my opinion, 30% is too aggressive. I wouldn’t assume anything less than 35% on any property.

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Ryan Daigle

Investor · Apex, NC · Member since 2018 · 253 posts · 215 votes

6y

@John Johnson I've seen well-run properties in the 20-unit range like you mention operating in the high 30s (38%). However, I wouldn't underwrite to that. The lowest I go in projections would be low 40s, but that's when I have good reason to go that low (recent major renovations, newer construction etc...). Your 30% feels way too low and offers no margin of error.

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Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

6y

In CA, I think 30% is not too far off, but it is a more better case scenario. That said, your mistake is taking that 30% and including the 5% vacancy. It should be gross less vacancy factor, then less an additional 30% for OE. Lastly, you should be underwriting at 10% Vacancy factor, not 5% (which is your best case).

So to summarize, your total expenses including vacancy should be at 40% or more for underwriting based on the details you have provided thus far. In other locations, you may be writing at 50% or more, especially if they are owner paid utilities (or a portion thereof).

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John Johnson

OP

Member since 2020 · 4 posts · 1 vote

6y

Thank you for all the feed back. It seems that most of the other developers that build 20-30 multifamily units 300 sf - 400 sf in the Los Angeles area were saying to look at around 30% with a 5% vacancy. I like to be more conservative so can I assume that the reserve of 5% with 30% expenses and a 10% vacancy will even out to about 45% of costs from gross rents?

Lastly due to having a 100% affordable building at ~$1,000 a month using Hud AMI I was hoping to have the entire building masterleased ... Is it common to assume less risk and lower costs if I would master lease an entire 20 unit complex on a modified or NNN lease.

This project would obviously not be a cookie cutter traditional market rate apartment hence finding comps have been quite difficult.

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Enrique Huerta

Investor · Los Angeles, CA · Member since 2015 · 213 posts · 162 votes

6y

@John Johnson, I'd go no less than 35% on Op Ex (excluding Taxes) and use 5%-10% Vacancy (depending on location in LA).

You'll find that affordable housing runs with tighter occupancy so I think 5% is ok for this project. Especially given those low rents, I would be surprised if you didn't pre-lease the entire thing at those rental rates (assuming it's a strong core location).

I don't know anything about master leases so I won't comment but one final tidbit is I would be interested in learning more about your project and talking shop. I do multifamily investments and development work. Let's connect!

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Nicolas Lares

Insurance Agent · Chicago IL & Palm Beach, FL · Member since 2026 · 16 posts · 3 votes

4mo

How are people in this thread accounting for insurance cost escalation in their hold-period projections? With the hard market showing some stabilization, there's a real question about whether to model flat, a modest decrease, or continued increases - especially since the answer varies significantly by asset class, geography, etc...

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Multifamily Operating Costs

Multifamily Operating Costs

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