Debit Management Fees from NOI or not?

Question

I can argue both sides. Should someone "running the numbers" of a multifamily property include management fees when determining NOI to determine cap rate?

Professional management is optional and has a fixed cost/percentage.

Self management is "free" - it has a cost but less tangible than hired management.

If someone is trying to do multifamily BRRRR math do you include management cost in your NOI?

Greg Scott · Answer

That depends.

If by multifamily, you mean 2-4 units, then NOI is an irrelevant number.  The valuation of properties 2-4 units are determined by Comparative Market Analysis.  That said, I would always put management costs into my pro-forma cash on cash returns.  You may not want to give free labor forever, so will want to know how that property performs if you choose to hire out the work.

When looking at 5+ units in multifamily, management fees should always be included in the NOI calculation.  Even if you are willing to work for free, the bank will assume some management fees for your loan sizing.  In other words, you can't do a cash-out refi if the valuation does not support management.  Also, buyers will assume some amount of management fees when buying.

Andrew Postell · Answer

@Jehon Bendokas yeah, same type of thing here.  If you are asking about 5+ units (which we usually call multi-family properties) then ask this question in the multi-family forum.  This forum is mostly for the BRRRR process on 1-4 unit properties.