Being a newbie, I completely defer to Propmgr and other experts on this forum and am using this rule of thumb to evaluate properties. I have a duplex and one SFR under my belt so far but am looking to get into multi-family. I am in TX and my question is this:
When we use the rule of thumb to assume 50-55% of gross rents as expenses does this include the following (given that this is TX I am dealing with):
- All bills paid multi-family properties (note: monthly electric bills for 3000 sq ft SFRs last summer were >$500 :banghead)
- The ridiculously high property taxes
I am currently evaluating a 14 unit property:
Price: $415,000
Gross Rent: $500/unit *14 = 7000/month
All Bills Paid by owner (ac/heat/water) – This is what scares the heck outta me. I am trying to get this answer to decide if I should even pursue evaluating this property.
Please advise.
You’d better have some serious fat built into that deal… I know that if I didn’t have to pay for any utility costs I’d take much longer showers, run that A/C a little colder, and not worry about if I turned off the living room lights…
ctrl-alt-del,
I never buy multi-units when the utilities (except water) are paid by the owner. One angry tenant can rob all of your profit by turning the heat or air conditioning on and opening all the doors and windows. Even if they aren’t doing it maliciously, they will still waste a LOT of energy when they aren’t paying the bills.
Theoretically, the 45% to 50% statistic should include paid utilities because the rent should be higher when the utilities are paid by the owner. As I said, I never buy multis when I’m paying the utilities (except water and I don’t even like paying the water).
Taxes certainly are included and again if the taxes are extremely high, the market rents should reflect that.
For your posted deal:
Gross rents: $7,000
Operating Expenses: $3,500
NOI: $3,500
Mortgage (P & I): $3,045 (20 year, 8% commercial)
Positive Cash Flow: $455 per month or $32/unit/month
In my opinion, that is too low. I like at least $100/unit/month. Combine that with the utilities being paid by the owner and I would RUN from this deal.
Good Luck,
Mike
Propertymanager likes to use the phrase “The Real World”. So here is some real world truth. The more units an apartment building has the more over priced a property usually is. Apartment buildings are so over priced that it is no small task to find an apartment building that actually cash flows. Also very few apartment buildings have the utilities sperated beyond electric. Try and think back to all the apartment buildings you ever lived in, I bet none of them had the utilties seperated except the electric. So now we’ve figured that your trying to find great deals (which in the apartment world is very difficult) and because only 5-10% of apartment buildings actualy have the utilities seperated means you have an even more difficult task. This combination of finding great deals and apartment buildings that have the utilties seperated will not come along very offen. In fact maybe never in your area.
I have properties that have all the utilties seperated and properties that do not. I like the properties that have the utilties seperated much better than the properties that are not seperated, but money is money. I have a duplex that brings in $1,345 a month. My PITI is $599.27. The utilities are not seperated, yet every month I make more money then I spend on this property, only because I bought at a great discount.
I have started to really like buying vacant properties that need rehab. Get them cheap and then seperate the utilities during the rehab. So that is another way to get into an apartment building that has the utilties seperated and maybe the only in your area. But don’t only look at properties that are seperated. Look for only great deals.
- Buy properties that have utilties seperated.
- Buy vacant beat up properties that you can rehab and seperate the utilties during rehab.
- Buy properties at incredible prices that don’t have the utilities seperated. Just remember to only buy these properties if it is a very good deal.
Also very few apartment buildings have the utilities sperated beyond electric. Try and think back to all the apartment buildings you ever lived in, I bet none of them had the utilties seperated except the electric.
Iron Range,
I agree with almost everything you said. However, I think this utilities issue must be a regional difference. Here in my little corner of Ohio, most of the apartment buildings have the uitilities separated (except water).
Look for only great deals.
- Buy properties that have utilties seperated.
- Buy vacant beat up properties that you can rehab and seperate the utilties during rehab.
- Buy properties at incredible prices that don’t have the utilities seperated. Just remember to only buy these properties if it is a very good deal.
DITTO! :bobble
Mike
That’s interesting Mike. I see 1-4 unit properties that have the utilities seperated, but it is rare to see an apartment building with seperate utilities over here. The properties that have seperate utilities are VERY unpopulary and usually tend to have higher vacancy rates(my experiences in Minnesota).
I have moved my investment searches more toward vacant properties that have damage especially freeze damage. Then I can justify the costs in seperating the utilities. The nice thing in my area is that I can have all the utilities in the tenant’s name. Although I am still responsible for the utilities if the tenant doesn’t pay.
I don’t mind buying properties with the utilities included but I require a very steep discount in price to justify the purchase.