Operating Expenses

Rehabbing, Fix and Flip, Rental Properties
1

I just finished putting the data into Quickbooks for one of my rental companies for 2006.

Here are the details:

Operating expenses were 40.1% of gross rents with me doing the management.

Some significant numbers were:

Legal expenses were 3.1%.

Maintenance (done by me) were 7.5%, although they were a little high because they included initial cosmetic rehab on 1 property.

Insurance was 10%.

Taxes were 8.6%.

Vacancies are reflected in the gross rent figure.

Mike

2

So if you were to use another company that charged 10% maintenance you’d be right about at 50%? Add to that if they charged a placement fee for new tenants…

3

I think your getting ripped off, my operating expenses run about 5% of the gross rent. SUCKER!!

4

Hi Mike,

You still need to factor in the cost of management (even though it’s you doing it, it’s still an expense of the property). And the same with you doing the maintenance, what is the value of your time in the market place. You didn’t state a purpose for doing these numbers. I assume it’s your year end recap but if you’re considering selling anything, you’d need to factor these costs in to keep it realistic.

Otherwise, you did pretty well considering the national average operating expense ratio is 45% of gross revenues. That, as you know, varies depending on several factors such as condition of property and amount of turn over.

Good job!

Cate

5

Cate,

You are absolutely right. My time is certainly worth something and I have not forgotten the management or maintenance. I also do not have any vacancy figures because the gross rent was the actual gross rents (not the projected gross rents at full occupancy). These were simply the actual numbers taken from the checks that I wrote during the year.

I was putting the numbers into Quickbooks in preparation for giving them to my accountant. I also like to do a year end analysis of how the business did. I thought the new landlords might like to see how tight the real numbers are, even when you buy at a huge discount. Obviously, if I hadn’t bought my properties really cheap, I would have had a loss. It’s not pretty, but that is the reality of rentals.

Mike

6

I have a pretty stupid question but pretty blunt. How did you come up with the percentages? I would like to know how to do this, I’m a big time micro manager.

7

Adam,

I just divided the dollar amount of the specific category by the total gross rents.

For example, let’s say the gross rents were $100,000. If the insurance expenses were $8,500, you would divide 8,500 by 100,000 to get .085, which is 8.5%. It’s just that easy.

Mike

8

I found a building with a gross income of $51k and $11k in expenses…should I buy it. LOL

9

Yes, and I’ve got a bridge…

Mike

10

Actually for the price and the income with 50% expenses it really wasn’t too bad, I’d only have a to haggle a little to get it at a cashflowing price. I don’t really want that area and over 4 units it requires a decent down that I don’t have so no go.

11

You give good info Mike. And thanks for such a time appropriate posting for the new landlords.

Also, Serio, you’re only looking at ‘operating expenses’. This does not include capital expenditures (i.e., new roof), or your debt service. Check with your tax preparer for what is considered operating vs. capital expenses. You can set up your Quickbooks or other property management software to split these out for easy calculation and review.

Cate.

12

That is why I never pay capital expenditures out of income. I refinance the property to pay for that kind of thing.

13

I cover capital expenditures in the operating expenses by a setting aside a reserve for replacement.