Operating Expenses for a 30 unit multifamily

[Kam Su]

I am currently looking into a 30 unit multifamily complex for investment. This is a rundown complex which needs rehab. The target rental price is approximately $500 per month with electricity,water included. What is a good thumb rule for estimating operating expenses? This property will need a management company services to operate. Is 60% of gross rent a good estimate?

Here is a brief rundown on my estimates:
Cost to acquire/rehab : $600k
Rent estimates/yr @85% occupancy: $153k
Operating Expenses @60% of rent: $92k

Annual Cash Flow:$61k

Are these estimates realistic/conservative/over the board?

Thanks in advance for your help.

[Joel Owens]

Is this property completely vacant, semi-performing currently, or fully performing??

How long is the local eviction court backed up and how long does it take to get out the bad tenants there?? This will affect your cash flow model.

Is it customary for the area for landlords to pay water for the tenants?? If it is you are wasting time and money sub metering as they will live elsewhere where utilities are paid.

If the building is old and just hasn't been updated to separate utility then look into it. Having the tenants get billed directly by the utility company is ideal and if they do not pay their separate meter gets cut off. Having private companies or tenant billing is not the same. In those cases it helps minimize costs to the landlord but generally the landlord is still on the hook for the complete water bill.

What's the unit mix of this 30 unit?? How many square feet per unit are we talking about?? Is their laundry on site or is it available in the rooms?? Is the 30 unit all enclosed by itself or part of a fractional development with other buildings?? This will affect your exposure and controlling the quality of the area and tenant base upon rehab.

What's the condition of the units?? Carpet and paint only, some mechanicals replaced, gut jobs where the copper and electrical needs to be put in etc.??

Are you buying cash or getting a HML loan?? If so you need to project out 12 to 18 months at least for rehab and stabilization to eventually sell off or refi out to a conventional loan. The lenders will typically go 75% of the new value. Water is very expensive. If you include water in the rent pay attention to the water and sewer rates the last 5 years for the area and see how much they have been rising, staying flat, etc.

If you say 500 I will be conservative at 450 unit.

450 X 30 = 13,500 MO x 12 = 162,000 year GEI -gross expected income

162,000 X .60 costs = 97,200

162,000 x .40 = 64,800 NOI

So at a 10 cap when you exit this property is only worth 648,000 before resale cost.

648,000 x .06 commission = 38,880 + closing costs of say 15,000 for resale = 594,120

Whether this is a deal all comes down to what you can buy the property for per door and how much rehab is needed. You can slap paint and carpet in there and try to call it fully performing in 12 to 18 months but a buyer that has a broker like me will know you have not replaced nay mechanicals and the capital cost to my buyer would be huge immediately upon purchasing and negate any returns. I would tell my buyer to pass on such a property.

If the units are a gut job you could spent up to 13,000 a door including the parking lot and windows and roofs and everything else. That would be 390,000 right there in repairs on a 30 unit. If it's just carpet and paint and few mechanicals you might can get by with 3,00 to 4,000 a door for 120 in repairs HUGE DIFFERENCE. You really have to know what you are dealing with a repair costs going into such a project. The high debt service from the hard money lender will need to be factored along with closing costs and points paid. I would not take on a totally vacant unit unless I get it dirt cheap and the rents are high upon completion. At 450 to 500 a unit you are talking an unsophisticated level of tenant that needs in depth management to collect payments. Not always but generally the lower the rents the more issues you run into.