I’m just starting to look at multi-family units for sale in my area. Several of them have the tenants pay all of the utilities. So does the 50% rule for expenses still apply? Or should it be a little lower in this situation?
Thanks for any help!
If you do not have all of the actual real expenses to prove otherwise I would definitely go by the 50% rule. The 50% rule was found by some Apartment Complex association or something related to that. I don’t recall the organizations name. Maybe someone will know. But they were looking at apartments and most apartment complexes have split utilities just as what you are looking at does.
Even though tenants may pay utilities, the owner still pays when the units are vacant. Your 50% overhead estimate will need to cover a utilities expense for your rental vacancies plus the utilities for the common areas (think hallways, parking lot, outdoor security lights, laundry room, maintenance closets, elevator, exit lights, emergency lights, sprinkler systems, etc).
Remember, 50% is just an average, not an upper limit. Your actual overhead costs could be higher or lower. Start with 50% and then refine your cash flow analysis as you get accurate expense numbers for the property.
These days, landlords are having longer vacancy periods and are also lowering rents to get their properties filled. Even though income drops, property taxes and insurance premiums still increase. One of my rental markets was especially hard hit by the recession last year and consequently, the net operating expenses for my entire rental portfolio came to about 64% for the year.
If you dont have a laundry room, and your tenants pay utilities, then your expenses are less. Vacant units dont use much and depending on what part of the country you live in, your expenses will vary anyway. The 50% rule is a guide rather than a standard.
Mine are nowhere near 50% but it is interesting to see what you guys come up with when you evaluate a deal with that rule on here.
In the area I live in, expenses are very high, but the area I invest in, they are very low. But that is relative to the cost of properties and tax rates. Ex. To mow my lawn here, $50. To mow the lawn of my 7 building apartment complex in the midwest, $100. Taxes on our 1/4 acre, 2500 sq ft, $750k home here - $12k a year. Taxes on my $1mil apartment property, 1.1% of the selling price, $11k.
You just have to make sure you have all your calculations done with accurate info on the property. Due Dilligence is key.
Actually, that’s not true. In every region and every rental range, the operating expenses run 45% to 50% of the gross rents. A recent study of more than 30,000 units all across the United States and in every rent range confirmed that once again. Larger studies with hundreds of thousands of units have also shown that. You’ll note that this doesn’t mean than any given rental in any given year will have operating expenses in the 45% to 50% range, quite the contrary. However, with a large number of units and/or a long time frame, the operating expenses do run 45% to 50%.
Mike
In the same vein, what about entity costs (registered agent fees, LLC fee, separate business checking account). Is this factored in to 50%?
HoldAndBuy,
This is just the quickey way of determining value. You should add in a couple thousand for closing costs, LLC fee, repairs etc to the purchase price. If you are looking at it in a more accurate way you should use a capitalization rate.
Triplex Example
Gross Income: $1,450/mth = $17,400 annual
Expenses (50% rule of thumb) -8,700
NOI: $8,700
Purchase price 45k@7%/15yrs: -$4,853 Use these terms on http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx . Take total purchase price and total interest from the amortization table and add the two. Then divide by the number of years you will have the loan and you will have the amount you will pay per year listed above. Then subtract it from your net operating income (NOI) and you have your yearly cash flow. Then divide the yearly by 12 for monthly and divide it by the number of apartments for the cash flow per month per door.
Yearly Cash Flow $3,847
Monthly cash flow = $320 divided by 3 units = $106 cash flow per door.
thanks hooch
Hooch is that supposed to be good? 106 per dr? gees… how does this determine value exactly…?
$100 per door or more is what many investors look for as far as cash flow goes. It does not determine value necessarily. Go to this link for more info on that. Determining value would be different depending on if you are selling or buying. I use the 1% rule or it’s ARV when selling for rental or flipping purposes respectively.