Expenses for Multi-Family Properties

[Matthew Roberts]

Is there a resource on BP with a list of all the expenses a multi-family owner can expect? Taxes, all the different insurance types, maintenance, etc... I have what I think to be at least 95% of the expenses covered, but its hard to know what you don't know. I've used the calculators, but there are general buckets. I'm looking for a comprehensive list to check off to see actual expenses, especially for San Diego and California where earthquakes and fires can be an issue. 

[Dan H.]

When you purchase MF of >4 units you should be given the previous year's actuals from the seller.  Verify it to the best of what you can.  Then Use it!

In San Diego the prop tax will reset sometime significantly (always based on selling price).  You can determine this quite accurately.  Get new insurance quotes prior to closing.  Maybe the seller has 10 properties and 500 units bundled together for a savings that you can obtain.  So the insurance you should have an accurate number on. 

Get quotes for property management. Compare it to what the seller disclosed. Property Management expense should be real accurate. Realize utility prices especially water are rising fast in San Diego. Call the utility companies. Rate increases are typically approved long before they go into affect. So utilities typically can be predicted fairly accurately. The seller will provide actual vacancy rates. If the units are below market rent you will initially have higher vacancy rates as you raise rents to (near) market rent. You can discuss with property managers what vacancy rates they are experiencing (this should also be done to somewhat verify the seller's claim on vacancy rate). If you are trying to raise the NOI it could very well fall before it raises even when you are doing everything correct.

Realize in general units that have not been rehabbed will need increasing amount of maintenance/cap expense until rehabbed (i.e. older units have more things to fail than new units).  Also cost associated with labor continue to increase in San Diego.  When you walk the units (walk every unit) note the condition of things.  Often there are the same things aged in many units.  When you walk the primary structure look for big items (roof, foundation, etc.).  Use an inspector but depending on number of units he will not inspect each unit (maybe he will if it if 10 units but if it is 50 units you will not want to pay for him to inspect each unit).  Maintenance/cap expense I believe is the hardest area to get an accurate first year forecast but you have the sellers expense reports (use them).  The expense reports along with what you find in the inspection and walk through will hopefully give you a somewhat accurate forecast of maintenance/cap expense costs in the first year.

For <5 units then I use 5% vacancy for self managed and have yet to have a year where, not counting rehab time, I was that close to 5% (always way under). If you are not going to manage it then 10% for property management (or get quotes) and raise the vacancy percentage a little (my only not self managed 1 to 4 units are a duplex STR which means I do not have an accurate vacancy percent for LTR to provide if you are using a management company). I do a cap expense estimate on each property (current cost/lifetime remaining in months = cap expense for the item). Example you purchase a SFR (I realize you are looking at MF but I am using this only as a simple example) with a HVAC that is 15 years old. Your HVAC cost for that size SFR is $5K (there is often a premium in summer) and that you believe HVAC have on average a 20 year life span (this is the number that I actually use for SFR HVAC - furnaces last a lot longer). The cap expense for this item is $5K/60 (i.e. 5 years of life left). $83/month. Many people think my cap expense estimate numbers are conservative (way high). I hope they are correct that my estimate is way high but I believe they are as accurately forecast as feasible. Cap expense for me is much higher than maintenance. I will indicate that I believe for small number of attached, fairly small units (my attached average 2 BR /1.5 BA) that $250/month per unit (I know it seems high) is about what my cap expense estimate numbers indicate. My maintenance is all over the place and does not seem to have much indicators of which units will be high (it is sometimes attributable to the tenant but not always) but fortunately average to a fairly low amount. Handyman is cheaper than contractors (mostly the plumber) but will result in times that you pay the handyman to look at the problem and the contractor to fix the problem but you need to pay both. I suspect if you budget $75/unit for maintenance (2-4 units) you will be fairly close. My handyman cost is about $50/unit average. The contractors are sporadic but probably total about 50% of my handyman cost if averaged out.

Good luck