Applying 50% rule to Apartments

[Jimmy H.]

So, i'm scouring Loopnet for commercial multi-family opportunities. I've noticed that many of the properties that list brief financials on loopnet have terrible overhead/operating expense ratios.

For example a huge 200-300 unit complex may have top line gross revenue of $2.7 mill but NOI of only $600k.

Or a 50 unit complex with $350k top line gross revenue and only $60k NOI.

Many variables go into this, I realize, and to truly find out you must do your due diligence on each specific property to see where the expenses are coming from.

My question is this - given that utilities included/not included is held equal for each property, do most variances in expenses on apartments arise from either poor management and deffered maintenance/old buildings.

This seems to be the two main variables. You can switch any complex to be utilities included, not included, or a mixture thereof. Holding that as a constant - do fluctuations arise basically from maintenance and management. And from that could I assume that a competent individual (hopefully that includes me lol) with due care should expect to be able to run almost any complex at the 50% rule?

Given a year or so to get good tenants, reduce turnover, and just manage the property well overall and get deffered maintenance issues in shape even replace HVAC's roofs ,etc if needed - is it reasonable to expect to be able to operate nearly any complex at or near 50% expense/overhead ratio?

It seems feasible to me, and if that's the case some of these apartment REO deal look really attractive. If a property gross's 350k and net's 65k and is selling at a current 9% CAP - that make sthe property worth $750k or so (which is the asking price). If i can improve operating efficency and get maintenance under control I think i can get the property NOI above 100k which makes the property worth $1m+.

Is it reasonable to believe you can get most any apartment complex to run at or close to the 50% rule. (again I know every property is different)

Thoughts?

[Jon Holdman]

Whatever number you see listed by the seller or their agent as the NOI should be assumed to be the best possible NOI they've managed to produce, if its less than 50% of the gross income. If its more than 50%, its probably overly optimistic and is leaving something out. Or (even worse), they've been deferring maintenance and getting in whoever is will put up with the place.

You can be pretty confident that getting NOI to 45-55% of gross rents will be about the best you can do for an apartment complex. Sometime back a member (no longer active) posted a large dataset covering many properties in most states. Expenses were quite consistently in the 45-55% range. They can certainly be much higher for a variety of reasons.