NYC operating expenses?

Question

Question for all the seasoned NYC / Brooklyn / Queens multi-family buy and hold investors out there. When analyzing multi family properties in our high-cost area, what rule of thumb or percentages do you use for estimating operating expenses?

I know the 50% rule is a favorite of many BP members across the country, but I find it hard to believe that in high cost areas like NYC or San Francisco, where a 3-family property can easily gross 100k in rental income per year, that 50k of operating expenses per year is a normal or reasonable estimate.

Property taxes on NYC multi-families is actually pretty low (like $300 per month), and insurance is also pretty manageable (conservatively $200 per month).Additionally, vacancy is generally very low here, at roughly 3% or less.Am I to believe that water/sewer/heat/maintenance/vacancy will account for over $3,500 per month / or $44,000 per year over the long term?I find this impossible to believe.

I’d like to hear a discussion from NYC or SF multi-family operators and what your experience has been and what a realistic expense estimate is.I’ve been using 35% in my own back-of-the-envelope projects, and to be honest, even with this lower expense estimate, I have yet to see a listing that cash flows positively with 80% financing. Thoughts?

Yin Choi · Answer

Depends on the neighborhood. The reason why you cannot cash flow positively in areas in Brooklyn is because of the price of the properties which makes your mortgage payment >50% of your monthly income. Why people are paying these prices? Appreciation play and/or preservation of capital (legal/illegal) - or they can afford to look 10 years down the road and take a cash flow neutral/negative property to eventually go cash flow positive - which circled back to appreciation

William Gonzalez · Answer

@Eric A.I don't know but i think you are right, i haven't catch the first but i go to use part of what Joe Villenueve says, to basically leave all this rules behind and plug my own numbers, i'm a handy man and i'm willing to take the risk, my brother has a rental in yonkers and honestly i don see all this money in vacancy, repair etc. For example i would go with $100 a month per door for vacancy a maintenance to analize the deal, 8% for property management, and basically that's it. However i will have an account to cover these expenses. If it cash flow over 300 a door with these expenses i will pull the trigger.

Eric A. · Answer

Thanks Adam K. That's is very helpful. Yes I realize you have to calculate expenses accurately for each individual property that you analyze, but I'm just looking for a way to ballpark it so I can filter through the huge volume of properties out there and only do a full analysis on a handful. Interesting point about most seasoned investors here only buy off market. I've been wanting to do that. I guess I need to subscribe to propertyshark for the lis pendens alerts and then start mailing. Does anybody else have any rough estimates in their experience? 25-30% sounds more reasonable but I suspect buying listed properties here are still going to be hard to cash flow regardless.

Adam K. · Answer

@Eric A.Don't bother with rules of thumb. Only way to do it is to try and accurately gauge the expenses for each individual property. Most places in NYC the landlord pays heat/hot water but not all. Always will pay water/sewer and common electric. But those #s are going to vary based on unit number, how many people live in each unit, size of the common areas (hallways, stairs, etc). Insurance will vary, taxes can be wildly different on neighborhood to another. Maintenance will be very different based on the age of the building and its mechanicals.I can tell you for one of the buildings we have the expenses have been around 25-30% of rent in the first year-plus and I anticipate about the same for the other building we just acquired.

Lelith Walker · Answer

My 3 family is the most 250 for water and that is rare. (Normally when there are guests over on holidays) My heat and electricity are on one bill. It varies from 125 in the summer to 600 in the winter. This past winter we did not have too much cold weather so I don't think my bill went over 300. I plan on changing this because I found out about a solar powered company that promised to cut my bills down.Maintenance costs vary. I do most of it myself. Plus I get away with cooking for people (handymen) to cut costs. Other men will do things for beer and wine. Thank God for bartering. For contractors I try to use the same company to get preferred customer credit.

Shmuel Harris · Answer

Ah gotcha. Thanks for clarifying.@Yin Choi

Yin Choi · Answer

@Shmuel Harris Chinese investors looking to preserve their wealth from the depreciation of Chinese RMB by buying up properties in California and NYC. They are not looking for cash flows. Just looking assets to park their wealth in.

Shmuel Harris · Answer

@Eric A.I don't have a rule of thumb that I go by.However, my experience has been that most seasoned investors here in the city are only buying off market properties. Mostly distressed situations. It is hard to find properties in NYC that fit into any of the rules of thumb here on BP.Happy Investing

Shmuel Harris · Answer

@Yin ChoiWhat is preservation of capital?