Apartment Complex Expenses?

Question

Hey guys!Trying to do some research on what the expected number for an apartment complex would run.  I've run across a deal that has gotten me thinking, but I don't have a lot of solid numbers in my mind.  I doubt I'll be able to move forward with the deal (a LOT bigger than what I've been playing with!), but it at least gives me a chance to figure out some hard numbers in advance.  Consider this a good thought experiment :)

I've so far invested in just single family rentals, and usually my expenses are right around 35-40%.  Which from what I hear is a relatively normal average.  So I have those nailed down pretty solidly.  I've seen 50% tossed about for apartment complexes, but again I'd rather figure out some solid numbers here.

So here are some real numbers, and I'd love to get some input/advice on them.

50 unit apartment complex, averaging right around $550/mo/unit.

Actual Gross Monthly Income: $27,610

Current occupancy is 96%, but I'll use a much more conservative 10%.

Vacancy: 10% ($2,761)

Maintenance is probably the biggest unknown.  This particular building is in decent shape and has been maintained well enough, though it's had very little capital improvements recently (potential for increased rents with some rehabbing, but not going into that here...)  But then I'm assuming there are things like landscaping and other general building expenses that I'm not used to factoring in.  Take a stab at 12%?

Maintenance: 12% ($3,313)

Insurance and taxes are relatively decent around here, so I'm going for 8% for each.

Insurance: 8% ($2,209)

Taxes: 8% ($2,209)

Management would definitely be hired out, and I'm assuming I can stick with my usual 10%?  (My SFRs I've gotten 8% with my current company, but I'm guessing they'd want to charge the full 10% for a medium size complex like this).

Management: 10% ($2,761)

So my biggest unknown and question for you all is about utilities.  Does the landlord/owner usually pay utilities, or do the tenants?  It's a relatively large expense if indeed the owner has to pay.  I've just discovered RUBS - I'm assuming that's something I could potentially add for each unit.  If I did, how precise would that number have to be?  Could I just make up a number, say $40 for the smaller apartments and $50 for the bigger ones and call it a day?  Or are you required to be very precise about it?

Again, just taking a stab at a number here, and going with $95/unit, but then look at charging each unit $40 for utilities, coming out to $55/unit, or basically 10%.

Utilities: 10% (2,761)

So total expenses are coming out to 58% ($16,014) including utilities, or 48% ($13,253) without utilites.

From the $27,610 gross monthly income, that results in:

Net Income: $11,596

The current asking price is $1,450,000, which also results in:

Cap Rate: 8%

So my 2 main questions are:

1. Are my numbers even close to being right?  If not, what'd I miss?

2. Is this a reasonably good deal?

Thanks so much!Joel

Nick B. · Answer

Here is basic expense breakdown that I use:

• Property management: 3.5-5% of collected rents & other income. Depends on the size of the property - ask a few PM companies in the area
• Repair & Maintenance/Make Ready: $500-$600/unit/year - depends on turnover rate and unit condition. If you do a first year rehab, this number should be lower as your R&M expense is essentially capitalized because of rehab (e.g. instead of carpet cleaning you replace it)
• Contract Services (landscaping, security, etc.): depends on the property condition and history
• General Administration: $200/unit/year but a PM company should have a better idea
• Marketing: $50-80/unit/year
• Payroll: $1100-1200/unit/year - may go lower to $1000 depending on PM company
• Utilities paid by the property: historical from T-12 inflated by 2%. Electricity may be adjusted to whatever current market rate is.
• Insurance: ask insurance broker
• Taxes: whatever local rules are used to calculate them
• Reserves: $250/unit/year

Hope this helpsNick

Nick B. · Answer

Contract Services are landscaping, trash pickup, snow removal, pool maintenance and the like. In other words, these jobs are performed by outside contractors on a regular basis.

Repair and Maintenance is the cost of materials and possibly 3rd party labor. Depending on the property size, R&M may be handled entirely in house, fully outsourced, or a combination of the two. In-house labor is accounted for in the Payroll category. Outside labor may go into Contrast Services if it reaccures on a regular basis or into R&M if this is something infrequent or a one-off

As for money amount, contract services are totally property-dependant and their cost vary. You have to know what the current owner pays and for what. Then you can get price quotes from different vendors to see what you would pay.

Repair & Maintenance and Make Ready should be around $500/unit/year on average. This includes normal turnover costs but excludes capital improvements which go into non-operating expenses.

Kurt Bender · Answer

@Joel Palmer - @Nick B. hit this one on the head. His numbers from my experience are pretty accurate. It's important to ask the seller or seller's agent for historical financials on the property. You cannot properly analyze a property without a couple years P&L's.

One of the major expense factors in a larger apartment complex is utilities and how they are metered. Meaning are they the responsibility of the landlord/owner or are they billed to the tenant. During due diligence you should request copies of actual utility bills for the last year or two to verify the sellers numbers are accurate.

It's probably not the best practice to use a percentage of gross rents to determine your expenses and underwrite a property. If you have limited access to historical numbers to base your underwriting off of, then using a determined amount per unit is a safer bet.

Nick B. · Answer

@Joel Palmer, the payroll is for on-site personnel. The rule of thumb is one employee for 50 units. So, for smaller properties it is always a challenge: do you want to have a manager or a maintenance guy? If you want both, you either pay them low (bad) or hire them part time (better). Another option is a full time manager and a contract repairman - a manager would collect work orders and call a maintenance contractor to perform the actual work. In this case your payroll stays relatively low but your contract services budget increases.

Nick B. · Answer

One more thing: the only expense that depends on the rents is PM fee. Everything else is essentially fixed and has to be paid regardless of the rents collected

Corina Eufinger · Answer

Maintenance: I feel this may be a little low. Beyond work orders for tenants, you will have building work orders. These are the other things this number needs to cover: annual sprinkler and fire alarm panel inspection, fire extinguisher service, lawn mowing, snow removal (?), if there is a boiler annual inspection on that, coin laundry maintenance, landscaping for flower beds, common area cleaning weekly or bi weekly usually, yard clean up at same interval, turnover costs.

Management: For a 50 unit, you should be able to find a property manager for less than 10%.  Typically in Wisconsin I see 6% for complexes. This being said, if you are trying to keep within the management budget you have outlined be sure to clarify any additional fees they may have (leasing, lease renewal, section 8, etc). Those fees can kill your management budget if you aren't aware of them.

Matt Nusbaum · Answer

@Joel Palmer

@Nick B. did a great job of laying out pretty accurate numbers/rules to follow. I'd reccommend taking a PM out to lunch and pick his brain on the local market and what numbers you can expect. This will begin to build your relationship with them and when you do come across a deal they typically offer to review your numbers to make sure you're on track.

Todd Dexheimer · Answer

I would say some of your numbers are ok, some are high and others are missing.

Property management on a 50 unit will be around 8-10%

Maintenance and unit turns around $700-$1000/unit/year

Taxes are based on the appraised or sales amount and can be figured using the county data. Usually it's around 1-1.5% or the sales price

Insurance is around $250-$275/unit/year

Now, your missing:

Contract services(landscaping, exterminator, etc) - This is going to be based on the size of the property and amount of land. Around $20k for a 50 unit, but this cost varies

Marketing - $75-100/unit

Administrative - $3000

Reserve account $300/unit/year

You also could have additional income, such as laundry income and utility recovery fees.

Most of this information will be disclosed to you if you ask for a Trailing 12 and the the past few years of profit/loss. The 50% rule a good smell test, but the age of the properties, the differed maintenance, the utility break down, rent amount, etc will all change the percentage of expenses on income.

John Stoeber · Answer

@Nick B I'm going to assume the Contract Services is handling most of the Repairs & Maintenance, so how would you allocate this expense to each line item?  Labor to Contract Services and Materials to R&M?

Joel Palmer · Answer

@Nick B. Gotcha, makes sense.

@Kurt Bender Good point about determining on actuals, and I would certainly need to do so upon further study.  Up to this point, I've only had a vague idea, hence why I was going on %, but now that I have much more detailed info, I can certainly get more precise!

Thanks again!!

Apartment Complex Expenses?

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