50% rule ? True or False?

Question

I’m reading the posts on this website discussing the 50% rule. We own few Class C Apartments Complexes, anywhere between 36 to 100 units. My management Company manages around 2,500 units. I have to say that based on our experience and if you factor all expenses into your spreadsheet you will most likely end up at the 65-70% operating expenses over time. Sometimes even more. Unless you go into a Class B+ or A or 160 units and above maybe, achieving 50% is difficult on Class C unless of course you manage your own building and decide to move over and live in the property….thoughts?

Jonathan G. · Answer

Here is how we make money – buy at the right time i.e. when market is down and at the right price – so you at least break even with your cash flow. Then, turn it around when market picks up. Currently, we all see increased rent and occupancy so I think it’s a good time for people with rentals. Rental market will only continue to improve with how economy is right now. At least for us, Real estate has never been a cash flow play. It’s the long/short term appreciation or market flips what may turn these investments into winners. Not their ongoing cash flow…

Marc Freislinger · Answer

I've seen water companies and gas companies provide water saving devices at no-charge to apartment complexes. The gas company did it to save on water-heater costs. Installed new aerators and shower heads in every unit. Worth looking into if you're paying the water. Of course, it wouldn't hurt to do it yourself anyway.

Steve L. · Answer

I think the opportunity, especially in the bigger units, is to slowly have the tenants pay the utilities and/or convert to solar, energy efficient, water efficient for common areas. At a 9% cap, every $100/mo you save in costs, increases the value by 13,xxx or so.

Jon Holdman · Answer

All bills paid is a killer. In theory, the rents should be higher because more is included, but I'm not convinced that's the case. I've wondered for many years how anybody makes any money off apartment complexes. I used to read a commercial RE paper here in Denver and saw the prices for actual deals. I don't see how anyone is actually making any money on these. Our old buddy MikeOH always argued they weren't. It was just a tax write off. I would consider fixing any deferred maintance issues to be part of the acquisition rather than ongoing expenses. That's going to push up your maintenance expenses until you get caught up. You'll always have maintenance, but if you're trying to catch up from years of neglect it will be higher than it should be.

Ed L. · Answer

I didn't read the study, but if you are paying all utilities it would stand to reason that your Operating cost would be much higher.... Especially if you are in a lower end C class. $100 electric bill on $1,000 month lease is only 10% $100 Electric bill on $500 month lease is a whopping 20%. 8-9% cap seems pretty good if your cost are running that high.

Jonathan G. · Answer

I can’t argue with such a study. Just talking from real life experience. These are all bills paid, Class C. With this hot summer in Texas, only utilities are 36% of revenues and even more…. but again, I can’t argue with a study looking at 10s of thousands of units…. My 70% considers ongoing expenses and deferred maintenance. Does not include any rehabs, acquisition or major cap ex. When you factor rent concessions and delinquency on these building and an average turnover with the deferred maintenance clean up for about a year after acquisition and increased utilities you get to 65-70%. Not to mention City code compliance issues....My actual cap rate is around 8%-9%.

Mitch Kronowit · Answer

What was the standard deviation on that study? Was everyone running in the 45-55% range or 30-70% range in order to arrive at 50% average?

Steve L. · Answer

The 50% rule is a guideline. I would imagine if you are paying a lot of utilities, incentives and the rentals are on the lower end of the price point ($500 or less a month) it would hard to get 50% expenses. Jon, I did read that study and it seemed to be mostly large Class A/B units from what I gathered.

Jon Holdman · Answer

A huge study, 10's of thousands of units, was posted by a former member some time back, and it seemed to confirm the 50% number. A more recent study posted by Bryan also provided the same conclusion. Its certainly easy for this ratio to be higher. But if you're consistently running at 70%, something is wrong. Are you possibly buying or taking over dumpy places and fixing them up and including the fixup expenses? That would usually be included as part of your acquisition cost rather than ongoing expenses.

Jon Klaus · Answer

What is your cap rate on the properties where your expenses are running 70%?