Houston, TX · Member since 2018 · 16 posts · 0 votes
Hello BP community,
I am looking at deal in my local market that's priced at $425K. This property will need about $75K in rehab and the market rents would increase between 5% and 8% once the rehab is done.
I am trying to figure out what expense ratio to apply to this opportunity. Does the 50% rule include only operating expense, or does it also include debt coverage and taxes as well? Also, what's a realistic operating expense ratio for a 6-unit multi-family deal? I feel like a 6-unit compelx is not as difficult to manage as a 10 or 20 unit complex.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y
Harsh Singh Short answer is that the 50% rule should cover everything but debt service and profit. That said, you can swing to 60% pretty easily so you’ll want to take a peak at a T12. And if there’s $75K worth of rehab the owners annual expenses are likely artificially low, which is likely what created the $75K need in the first place. So you’ll have to walk that balancing act.
I don’t think 6 units is harder or easier to manage than 20 units. With 20 units something is “always going wrong” so I’d propose that it’s actually easier to manage. You don’t have a “bad month” because there is always good and always bad. Or, put another way, all things equal it’s easier to manage a 20 unit complex than 3 buildings that are 6 units each.
Investor · Hoboken, NJ · Member since 2016 · 464 posts · 179 votes
8y
Hey @Harsh Singh The 50% rule of thumb for expenses does not include debt servicing. However it includes taxes. It should be easy to work out the expenses for a six unit. If you are sourcing the property from a broker, ask them to provide you with the 12 month trailing financial for that property so that you can verify and accurately estimate the expenses.
Houston, TX · Member since 2018 · 16 posts · 0 votes
8y
Thank you for the reply. This is a mom & pop apartment so there are no financials just rents and the expenses that were included was insurance, utility and that's it.
I am trying to build a pro-forma with the info that I do have.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y
Harsh Singh Short answer is that the 50% rule should cover everything but debt service and profit. That said, you can swing to 60% pretty easily so you’ll want to take a peak at a T12. And if there’s $75K worth of rehab the owners annual expenses are likely artificially low, which is likely what created the $75K need in the first place. So you’ll have to walk that balancing act.
I don’t think 6 units is harder or easier to manage than 20 units. With 20 units something is “always going wrong” so I’d propose that it’s actually easier to manage. You don’t have a “bad month” because there is always good and always bad. Or, put another way, all things equal it’s easier to manage a 20 unit complex than 3 buildings that are 6 units each.
Investor · Morrisville, NC · Member since 2012 · 1k+ posts · 673 votes
8y
@Harsh Singh . You also want to talk to the owners and get an idea of all the expenses they have gone through for maintaining the property. For example; Make sure to understand who pays utilities. Are there common areas, where the owner is responsible for? Does the property need landscaping? How is garbage disposal done? Is there an existing contract in place? For some of these numbers, you can get the actual numbers by either calling contracting companies or just finding off various websites.