multi famiy underwriting techniques

[Robby Sanchez]

Hey everyone, me again, I am practicing underwriting MF deals and came up with a few questions (I am sure there will be more). 

-when figuring rules of thumb regarding payroll cost per employee/position or things like repairs and maintenance cost, contract services, etc. per door in a specific market do yall suggest contacting a property manager to find out these numbers or actually using google or job listings etc. i thought about using chat GPT as well. any thoughts on this? I realize that these numbers change depending on size of the property, position type etc. as well as every market is different and fluctuates. just trying to get some general advice on this. TIA 

[Charles Seaman]

@Robby Sanchez Calling property managers who know the market(s) that you're looking in will produce the best results.  Keep in mind that a rule of thumb is simply a rule of thumb.  It doesn't mean that every property will fit that rule of thumb.  Too many people get caught up in this thought when they underwrite deals.  Also make sure that you're using 
"per unit" numbers for your rules of thumb because this is much more accurate than simply looking at the expenses as a percentage of the property's income.

[Robby Sanchez]

Quote from @Charles Seaman:

@Robby Sanchez Calling property managers who know the market(s) that you're looking in will produce the best results.  Keep in mind that a rule of thumb is simply a rule of thumb.  It doesn't mean that every property will fit that rule of thumb.  Too many people get caught up in this thought when they underwrite deals.  Also make sure that you're using 
"per unit" numbers for your rules of thumb because this is much more accurate than simply looking at the expenses as a percentage of the property's income.

 thanks charles, i realize that the rule of the thumbs are not a 1 size fits all. I agree with the per unit approach as well. Doing it that way also allows you to get a general idea of how much income is needed to at least be close to breaking even. obviously being close to the break even line is not where anyone wants to be but it is interesting and useful metric.

[Calvin Graves]

Is the assumption here that it's owner-managed and the owner is hiring help?

Otherwise, if you're assuming third party management, then maintenance is either baked into their fee or charged hourly like a vendor. 

Remember the purpose of a proforma is to determine if a deal pencils broadly, so getting extremely granular doesn't add anything useful. If hourly vendor vs salaried maintenance is what makes or breaks the deal...it's not a good deal.

Your best estimates are likely to be from managers/owners of buildings similar to your subject property. Ask if they had X, Y, or Z work done in the last 12 months, how much it cost, and who did the work. And if you're talking about very large properties, you can probably find $/SF stats by market.

[Justin Moy]

I'd ask a property manager in the area. Ask 3 or 4 companies that work with the size and type of deals you're analyzing and you'll likely pick up some themes. 

Use those for your analysis. 

These can be used for things like payroll but will get trickier when talking utilities or repairs & maintenance as a lot of those have to do with how old the building is or what condition it's already in

[Brian Burke]

@Robby Sanchez rules of thumb don't work, as others here have stated.  The main reason is other buyers who are better able to pin down operating costs will either outbid you because they have their costs right, or you'll outbid them because you have your costs wrong.  Neither outcome is good for you.

I give some approximations of each expense category in The Hands-Off Investor, but the best way to nail down operating costs is to look at the property's historical performance.

For example, Contract Services and Utilities.  Look at the trailing 12 month's expenses on the seller's operating statement.  Add some escalator, such as 3%, for example, to account for potentially higher costs after closing.  

For payroll, ask the seller for a staffing matrix, this lists each position working at the property and their salary.  Don't forget to add fringe benefits such as health insurance and also payroll taxes, etc.  Ask your property manager to prepare a staffing plan which would show how they would staff the property and what the salaries would be.  Compare that to the seller's staffing matrix and make adjustments as needed.  You'll most likely find your staffing costs to be in the neighborhood of $1,200 to $1,900 per unit per year, depending on property size, class, and market.  Anything less than that means the property is either understaffed or the staff is underpaid.  Anything over that could mean that the property is overstaffed, or it could mean that management is delivering a very high level of service such as in a luxury property that has a doorman and all sorts of staff that you don't typically see in garden style apartments.

[Robby Sanchez]

@Brian Burke@Justin Moy@Calvin Graves

thank you all so much for the great pointers! I am definatley going to keep these posts for future reference. Hope you guys have a great holiday and may the new year treat you well!

if you you ever need inspection services or boats on the ground here in Central texas hit me up! I'll be happy to help!