4-Plex Expenses Underwriting %'s

[Brendan Miller]

What does everyone use for underwriting deals on small multifamily properties (2-4 units). Right now, I've been using the below as standard %s, but I often see realtors provide financials with much lower %s. I'm curious if I'm being too conservative and missing out on deals. 

Insurance: about 4% of gross rents

Vacancy: 3-5% depending on the market, and # of units

Maintenance: 5% (I've been offering on 'newer' properties 1990-2006)

CapEx: 5%

Water/Sewer/Trash: $75/unit/month; $300 total/month for a 4-unit

Property Management: 7-10% of gross rents depending on the market

Misc: $50/month; depending on the property, I also plug in minor costs for landscaping, legal, etc

Any additional help/input is appreciated!

[Nick B.]

Similar logic applies to capex. Look at the expected service life of major parts (e.g., roof). Find out how much the replacement cost is. Divide the cost of replacement by the number of years of useful life of the same item. That's the capex number for that item per year.

Maintenance is $300-400/year/unit but for a 4plex the variance may be big either way.

Vacancy is not an expense but it can be expressed as a percentage of rents. Assume than half of the units would be turned in a year. Then assume at least 2 weeks to complete the turnover. This is market specific though. So, for a 4plex you'll have 2 units vacant for 2 weeks in a year or 1 unit vacant for a month. That's 3% physical vacancy. Than you need add to add loss-to-lease, concessions, and bad debt. Each one has its own dynamics.