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25% expenses on Multi Family

Jordan Vires
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Posted Jun 25 2014, 05:51

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

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Brock Y.
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Replied Jun 25 2014, 05:58

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. 

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Patrick L.
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Replied Jun 25 2014, 06:06

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.  

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ModeratorReplied Jun 25 2014, 06:07

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

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Replied Jun 25 2014, 06:08

@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.

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Jordan Vires's profile image
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Jordan Vires
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Replied Jun 25 2014, 06:09

@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

Jordan Vires's profile image
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Jordan Vires's profile image
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Jordan Vires
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Replied Jun 25 2014, 06:11

@Brie Schmidt

I have asked for actuals this morning. This is on same deal as yesterday we discussed, the 16 units Forum where you helped me determine value! Thanks for that :)

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Patrick L.
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Replied Jun 25 2014, 06:12
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%.  

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ModeratorReplied Jun 25 2014, 06:16

@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.   

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Replied Jun 25 2014, 07:44

@Jordan Vires the 25% is not accurate. New construction for a Class A community might run 40% and it goes up from there based on age, condition, bill backs (or lack there of), amenities and any # of other factors. Stick to 50% and you might find it's closer to 60% than 50% after looking at the #s. 

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Replied Jun 25 2014, 09:00

@Jordan Vires 

Your agent doesn't know what they are talking about.  Like @Joe Fairless said new construction class A can run around 40% depending on rent pricing.  You might get closer to 35% with higher rental rates in luxury new construction buildings however I doubt that is the case where you are looking. 

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Jordan Vires
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Replied Jun 25 2014, 09:05

Thanks @Joe Fairless and @Chris Winterhalter thats sounds like a solid plan for evaluation.

I think the 16 units at maybe 40k per unit (they rent for $550) maybe the highest price one could go. Id like to get em for like 35k but not gonna happen.

I also agree with @Brie Schmidt on utilities etc. They definitely are elevated with more units.

Thanks

Jordan

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Jordan Vires
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Replied Jun 25 2014, 13:17

More info from realtor......Still standing ground by their expense proof multifamily buildings......

"Here is the answer on the question about manager.

Also, as far as lowest price per unit, I would just say make him an offer but I know he isn’t looking at it using a 50% vacancy rate and repairs."

I should send her a bigger pockets forum link on 50% rule!

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James Leos
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Replied Jun 29 2014, 21:45

A couple days late on this, but I have a fourplex (all 2bed/1.5bath) that's low maintenance with little turnover and my actual expenses (excluding captial improvements) are around 45%, I pay for water/sewer/trash and property management.

One thing to note, my average rents are about 700, if they were 550 the expenses would be 55% of gross rents. Few expenses are directly proportional to the gross rent, the lower the rent, the higher the expense ratio.

I only have one property to compare, but the 50% rule seems to be a good rule of thumb.

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Replied Jul 9 2014, 21:06

@Jordan Vires 

Great questions.

The average expense ratio for a multifamily property (especially 5 units or more) is between 50% - 60% with property management considering owner pays for trash and lawn care only. If owner pays for any other utility, expense ratio could even exceed 60%.

Don't worry about what seller or listing agent or even buying agent claims regarding expense ration, do your own due diligence. 

Hope it helps.

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Replied Jul 10 2014, 22:41

On to the Next one! Its a numbers game, when you start questioning your numbers and use someone elses numbers that's when you get into trouble. 

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Replied Jul 11 2014, 10:27

I would also say this, since your starting out I would apply the 50% rule until you have one  or more under your belt. 

Once you have the first one or two your belt, then you can start to reevaluate your numbers. 

I am just now in the process of purchasing my first 6 plex, and the great thing is in a few months I can start to really understand for the future what goes into owning a property like this. Which will only help me when I start to purchase the bigger complex's. 

Its all experience, but until then, do not let anyone tell you the numbers they want you to have. Hope this helps! 

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Egemen Toprak
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Replied Nov 9 2017, 07:22
Originally posted by @Account Closed:

I would also say this, since your starting out I would apply the 50% rule until you have one  or more under your belt. 

Once you have the first one or two your belt, then you can start to reevaluate your numbers. 

I am just now in the process of purchasing my first 6 plex, and the great thing is in a few months I can start to really understand for the future what goes into owning a property like this. Which will only help me when I start to purchase the bigger complex's. 

Its all experience, but until then, do not let anyone tell you the numbers they want you to have. Hope this helps! 

 Hey Amir, i am curious if its okay to share how is gross rent/expense ratio going ? 

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Replied Dec 2 2017, 06:41

Appreciate all of the experienced advice on here.  I haven't purchased a property yet, but is it possible the discrepancy the rent-per-square-foot in the market?  Are you in a major city?

For example, I'm in Boston, where a 750 sqft apartment in Back Bay (downtown) might rent for $2,500.  The same apartment in neighboring East Boston or Chelsea might rent for only 1,0000-1,200.  In similar apartments with good tenants, wouldn't operating expenses (reserve, maintenance) be similar for each?  In this case, a 50% rule for Chelsea would be a 25% rule for Boston.

(Assumes similar taxes, insurance, town utilities, etc).

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Replied Dec 2 2017, 09:00

I have had agents tell me everything over the mortgage payment is positive cash flow. Real estate agents that do not invest know how to sell nothing more. If they do understand real world numbers they would be less than candid selling to a newbie investors anyway. Buyer beware.

Investors are expected to know, agents are in business to sell. 

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Replied Dec 2 2017, 09:54

I think it would be dangerous to go under the 50% rule. As many people have stated, the 50% rule accounts for repairs and unanticipated expenses, not just regular monthly expenses like utilities, insurance, and HOA.

One way to push back with the Realtor, would be to ask them what expenses were allocated for repairs this year, and what repairs were completed.  If she says none, then ask her what type of deferred maintenance does the property have.  We all know that a property can't chug along for over a year without SOMETHING needing repair, and when you don't keep up with those items, they stockpile for the new owner.  You don't want to be stuck holding THAT bag.

The Realtor is doing her best to sell the property, that is her job, so you can't fault her.  However, you either need actuals that you can plug into your analyzer to evaluate, or you can create a proforma, but it has to include the 50% rule to protect you.

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Replied Dec 2 2017, 19:40
Originally posted by @Jordan Vires:

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

 Stick to what helps you achieve your goals. Sounds like you’re working with the listing agent. Representing the seller he is going to push for a higher price. 25% is way to low. 

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Replied Dec 2 2017, 22:20
Originally posted by @Ezra Okon:

Appreciate all of the experienced advice on here.  I haven't purchased a property yet, but is it possible the discrepancy the rent-per-square-foot in the market?  Are you in a major city?

For example, I'm in Boston, where a 750 sqft apartment in Back Bay (downtown) might rent for $2,500.  The same apartment in neighboring East Boston or Chelsea might rent for only 1,0000-1,200.  In similar apartments with good tenants, wouldn't operating expenses (reserve, maintenance) be similar for each?  In this case, a 50% rule for Chelsea would be a 25% rule for Boston.

(Assumes similar taxes, insurance, town utilities, etc).

But, can you "Assume similar taxes, insurance, town utilities, etc"? 

It's my understanding that location doesn't necessarily only affect the Rents.

eg. For every month vacant, downtown is costing an extra $1300, vs East Boston or Chelsea!

In principle, you're right that the percentage won't be the same across the board. But, it might not vary by as much as what you're suggesting, either. My 2c...