Hey @BOB CRANEY you present a couple of really good questions here.
#1. Why are the larger apartment complexes selling at a higher sales price per unit as compared to the smaller 1 - 4 unit properties?
One of the advantages of investing in larger properties is the economies of scale you are able to realize on the expense side.
For example, management fees are an expense which has an inverse relationship to size. So, as the size of the property and amount of revenue generated increases, the management fee as a percentage decreases. For example, you may have to pay a 10% management fee to a property manager who manages a four unit property. Property management fees for 100+ unit properties are usually 3 - 4%, and can be as low as 2%.
These economies of scale happen across a number of expenses which occur in the management of large multifamily properties. As a result, your NOI per unit should increase for larger properties. Because the larger properties are valued based on their income, this can result in a higher per unit sales price as you scale up into larger properties.
#2. What is an average expense ratio to use when analyzing properties?
My guidance is to never use a rule of thumb when calculating expense ratio for larger apartment complexes. There are many reasons why I would advise against using a rule of thumb, but here are a few reasons why your expense ratio can change significantly from property to property:
-Age and Class(A/B/C) of Asset - In general, the older the property, the higher the expense ratio.
-Location - Every location in the United States has a different labor costs relative to rent. As a result, payroll per door varies significantly throughout the country. For example, in Los Angeles, your payroll per door may be $2,000 per unit. In Tennessee however, payroll per door may be as low as $800 per door.
-Size of operator - in general, the larger the operator, the lower the expenses. For example, a large operator such as Sam Zell of Equity Residential is able to utilize in house lawyers to lower property taxes, in house accountants to lower professional fees, in house construction which can negotiate lower costs for Capital Expenditure items and will also most likely have a centralized marketing department that is able to service all of their properties in a cost effective manner. Most of these efficiencies will not be able to be realized by a smaller owner who owns 500 to 3000 units. As a result, the larger operator can offer a higher price for the same property, and still generate equivalent returns.
-Utility expenses - These can vary widely due to geography, age of property, tenant class and whether or not utilities are paid by the owner or the tenants.
-Taxes - These also vary widely geographically and as mentioned above, can change based on ownership.
In conclusion, the first takeaway is that you may be comparing apples and oranges when comparing properties of different sizes, even if they are in the same market. Secondly, if you use rules of thumb for evaluating expenses, you will either be missing out on great opportunities, or will be overpaying when expenses turn out to be higher than expected. Take each expense one at a time and build your expense ratio line by line.
Another thought, your observation when comparing per door sales price across different property sizes is great. Doing this in different markets may expose opportunities that are overlooked by others.
Let me know if you have any other questions. Thanks!
