Expenses and cash flow

:help I need some advise. In evaluating multi-family buildings, as a first step (before actual costs are known), is there a percentage of effective income that investors use to determine NOI. Also, what is a reasonable cash flow $ amount per unit. I’ve read 100 and 50. Thanks


I am not sure what you mean by Effective Income. If you are talking about Gross Operating Income, then there really is no general percent to subtract for expenses. Every property will be different for the most part. In any market, there really is no reason to speculate on expenses. Mosy sellers and or their realtors should be able to provide all of the necessary information quickly and simply for the asking.

I’ve seen property in which the expenses were just 30% of gross and I’ve seen property with 65% expenses.

Be careful when reviewing the income and expenses and make sure you calculate something in for vacancy, managment and maintenance. Often times sellers self manage or do the maintenance themselves and do not calculate this expenses into the report.

I always include something for those items even if I paln to self manage and /or maintain if for no other reason than my time is worth somthing and the day may come when I wish to resell the property and the next buyer may not wish or be able to self manage and or maintain.

Hope that helps

Jason mathews, the skeptical real estate investor.

Absent actuals, you can usually assume 50% of your income will go toward expenses and net the rest. Master metered apartments in cold weather climates can run higher – especially if the building is old. Understand that this should be used for screening only. You really have to get the actuals and extrapolate if the numbers are unrealistically low. Be careful of any property that claims expenses substantially less than 50% for an extended period. Over time, everything needs maintenance and 50% should be a minimum.

Some advocate a $ per unit for cash flow but I don’t. It really depends upon what you pay. Return on investment is a better gauge in my opinion. $100 per month results in a 12% ROI if you pay $10k per unit ($100x12/$10000=12%) but substantially less if you pay say, $40000. It boils down to the ROI you need, what you can get elsewhere, and how much you expect to be paid for the risk you’re taking.

In “normal” times, when you could reasonably expect some appreciation, I’d accept less ROI if I knew the value of the property would appreciate or I had a way to force some appreciation. Now, I would not even consider a property unless I could both force appreciation and generate a substantial ROI.

I would be skeptical of accepting the seller’s numbers (or anything else they say for that matter) at face value…

Check with your local apartment owners association or go to a investors club to get ball park figures for the area you’re working in. Miami is going to be a lot different then Green Bay which is a lot different than Los Angeles. If you are just looking for a rule of thumb be sure its where the property is located.

Good luck,


I completely disagree with what has been posted above. Expenses, as a percentage of gross income, do not vary significantly from area to area and it is nearly IMPOSSIBLE to get accurate numbers from an owner or agent. The fact is that the vast majority of owners don’t even know WHAT the operating expenses are, let alone have accurate numbers for them.

Throughout the United States, operating expenses (everything except principal and interest) run 45% to 50% of the gross rents. These operating expenses include, but are not limited to, taxes, insurance, management (even if you do it yourself), maintenance (even if you do it yourself), utilities (even if only during vacancies), entity maintenance, legal expenses, advertising, evictions, vacancies, lawsuits, damage done by tenants in excess of the security deposit, capital expenses (not technically an operating expense), etc, etc, etc. Many of these expenses are IMPOSSIBLE to predict for a given property in a given year. Furthermore, in my experience, there isn’t more than 1 investor in 100 that has accurate records for their property.

Therefore, I believe that the most accurate way to evaluate a property is to use 50% of the gross rents for the operating expenses. You need to understand that 50% is the average over a number of properties and/or a number of years. It does not tell you about the expenses for a particular property in a particular year. One roof replacement; one messy eviction; one angry tenant who severly damages the property can cause the expenses to be MUCH higher than 50% in a given year. Likewise, the absence of any adverse events can cause the expenses to be somewhat lower than 50% in a given year. However, the key is that over a long period of time and/or a large number of units, operating expenses run 45% to 50% of the gross rents. That is the number that is important if you plan on operating a business.

Good Luck,


Man I must be that 1 of 100 Mike. I use Peachtree accounting and I can tell you to the penny what all my expenses are for the last 6 years on every one of my properties. I use it to develop a new budget year to year. It’s amazing how close I can estimate now. But yes your 50% rule is an excellent rule to work from.