25% expenses on Multi Family

23 Replies

Do any multi families actually operate with only 25% expenses in relation to gross rents. I made an offer on a multifamily property and used 50% rule as a guideline. The realtor's response was.....

" Vacancy rate, is less than 10%. Most of the time there is a waiting list and vacancies are filled as soon as the unit is cleaned and or painted if needed. As far as expenses he said 25% was a huge amount ti figure so not sure where we go from here, we seem to be do far apart."


Should I stand firm on 50% ? I thought I should. However they act like this is some special situation where even 25% expenses is high. Anyone ran into anything like this? I figured they are are stating this to justify asking price that is way too high!!

Thanks

Jordan

It seems like he is referring to the month to month expenses which for my multifamily properties is closer to 25% than 50%. The 50% rule is for you because most likely a furnace will go out, a roof will need to be replaced etc. Just yesterday I had a $1200 expense for a water heater at a property. 

The agent is going to try to convince you that gross rent - taxes & insurance = profit.  I see listings all the time using that formula, especially here in the Marketplace.  Most sellers will always try to ignore capital reserves and management at a minimum.  In order to justify their list price they often have to tweak the numbers.   

If you want to be at 25% expenses and vacancy is 8% (industry standard, 1 vacant/unpaid month per unit per year) and management is 10% then that only leaves 7% of gross rent to cover taxes, insurance, repairs, any owner paid utilities, and capital reserves.  

For 5+ unit properties I have seen 50% or higher.  Have you seen the actuals?  

@Jordan Vires This is a case of an agent just not understanding investment property. You should absolutely stick to your guns on the 50% rule. Below is how I break down the 50% rule to my clients here in Connecticut.

The 50% is a short term & long term view of maintenance that needs to be and will need to be done.

It is much better to have adequate reserves than to be "chasing" that money for years after a significant unplanned repair needs to be made.

Now, if the subject property has ZERO deferred maintenance and I mean ZERO, maybe there is some wiggle room, but I would still stick to the 50% rule.

This way when repairs do come up you can take care of them and not leave them neglected because money is tight.

Overpaying for a property impacts a lot of things including the ability to be patient when filling vacancies along with being able to address maintenance issues when they arise.

Just my $.02.

@Patrick L.

So does 50% rule take into effect vacancies?

They did try on the convincing like you said...and yes she is mainly a residential realtor.

She said there was $94,000 in NOI....she literally subtracted out taxes and insurance from 100% gross rents...lol

Originally posted by @Jordan Vires:

@Patrick L.

So does 50% rule take into effect vacancies?

They did try on the convincing like you said...and yes she is mainly a residential realtor.

She said there was $94,000 in NOI....she literally subtracted out taxes and insurance from 100% gross rents...lol

 That doesn't surprise me, you can't use their numbers.  The 50% rule accounts for vacancy but not any owner paid utilities.  It's not 100% accurate but it's a great rough estimate, you may find your expenses higher or lower than 50% but there's zero chance that it's anywhere near 25%.  

@Jordan Vires  - No problem.  I buy 2-4 units but have looked at more than a few bigger properties.  The big difference IMO is Utilities.  Usually the city water / sewer and much higher per unit than if I bought a 2-4 unit because I am still billed as a residential property.   Also with commercial properties trash is different as usually you need a commercial provider.  (residential it is part of your taxes) and then the taxes on 5+ are also much higher.