50% rule for expenses -

[Frank Quan]

Hello BP Community,

I am curious if there any any multifamily property owners who can assist with basic underwriting. Using the syndicated deal analyzer, from Michael Blank, 50% is a rule of thumb used for expenses for initial underwriting. How true is this from your experience? I am specifically underwriting a property in NW Georgia.  

-Frankie

[Kevin Dean]

Hey @Frank Quan, I would not use the 50% rule when analyzing multifamily properties. In reality expenses as a % of revenue will be based on the location, size, year of construction and current operations. 

Large, newly constructed, well managed properties with high rents, low vacancy and high "other income" can have an expense ratio as low as 30%.

Smaller, older, poorly managed properties with under market rents, high vacancy and minimal "other income" can be cash flow negative. Meaning an expense ratio above 100%,

You want to evaluate every property, and every line item individually, and validate your assumptions with your property manager. 

If you use the 50% rule for all properties, you risk overpaying for poorly performing assets and underpaying for well-run properties.