Incomplete CapRate Calculations

[Erik W.]

I am considering buying my first small apartment property to own myself.  No syndication/partner deals yet.  I'd like to try a small deal first before seeing if this is really an area I'd like to focus future efforts.

Up until now, I've been mostly a SFH investor, with a few duplexes and a four plex. I've read quite on how to calculate numbers like GRM, NOI, CapRate, etc. and why sometimes those numbers are good and sometimes terrible to evaluate a deal. But basically, what I'm thinking about here is the tendency to include vs. exclude certain pieces of information that impacts the bottom line, regardless of which metric is being calculated.

What I am finding is many Sellers/Brokers are not including all of the expenses that impact NOI; therefore, the Cap Rate is inflated. Say it ain't so....sometimes people "forget" and/or are simply being dishonest.

So let's say an advertisement shows a CapRate of 8%.  Then they show incomes and expenses.  The expenses I see left out most often and my allowances for each in parentheses are as follows: 

Property management (10%)

Capital Expense Reserves (5%) - I am assuming they don't include this in Maintenance.

Vacancy (5%)

Lawn care/Snow removal (2-3%?)

There are a few other things here and there, but these are the one I see missing most often.  I've noticed this trend on small apartment (5-40 units).  Medium and Large apartments tend to include these expense(s), as they should.

My questions:

1) Would you bring this to the listen Broker/Seller's attention?  My thought is to bring it up casually like, "I noticed there's nothing in these figures for lawn care...." etc.

2) Is there a certain number of units or NOI range below which it is standard business practice not to consider those expenses? For example, maybe they are only marketing to Mom and Pop operators, and from what I have seen Mom and Pop often do the work of mowing and managing themselves.

Your experience is appreciated.

[Neil Schoepp]

You will notice quite often they forget things. That's why the golden rule is Trust but Verify.

When I am evaluating potential deals I will add those missing numbers in then present my offer to the broker explaining how I saw these were missing and added them into the expenses as they are legitimate cost. 

Sometimes you will get push back from sellers that they are self managing  or they have tenants take care of the snow. I then politely explain that I am an investor, that these are the cost of running the property  for me to be able to take care of both the clients and the property I need to have these cost included. Most of the properties I look at have been owned by Mom and Pops for decades. I always come at it from the angle of I will be taking care of your "baby". That if you sell to me I will pamper it care for it and restore it. 

Don't get trapped by what they say. Know your market, Know your numbers and stick to them. Remember you make your money on the buy NOT the sell.