Figuring Expenses on Multi Family Properties

[Ted Klein]

I have been analyzing many deals in the Puget Sound region and am having a hard time finding deals that make sense on the MLS. I am using the BP rental property calculator for my analysis and am allowing for everything including property management expenses.

I am concentrating my search in C to B- properties and could use some advise on what is reasonable for expenses. I am thinking that I may be overestimating my expenses as the BP calculator uses a % of the gross monthly rent. Should I be using a hard number per door?

I understand each property is unique and that older properties will likely have higher expenses so the number that I use would be dependent on the age of the property. I have read about people estimating their expenses based upon the useful life of the cap ex items, roof, hvac, appliances etc...

However, when analyzing properties this information isn't available. What would be a good method to determine what a properties expected capex expenditures would be when analyzing properties for consideration?

[Patrick Britton]

@Ted Klein I have spent hundreds of hours attempting to estimate repair costs based on certain independent variables, such as the age of the home, size, number of bedrooms and bathrooms, etc., for SFR. And while I believe I have found an accurate measure, it is never the end-all figure.

It is even more difficult to estimate repair costs and ongoing maintenance with multifamily properties.  Therefore, you may have to employ a two-stage analysis in these cases.  Stage one is simply to ascertain if it looks good on paper with little or perhaps even zero amount allocated towards capital expenditures.  If everything checks out on paper, perhaps by a certain margin, then the property is worth a drive-by or perhaps even interior showing, which would be stage 2.

You could also assume that the property needs a certain amount of repairs per square foot upfront, followed by an ongoing amount, again by square foot.  For instance, you could assume that anything in King County built before 1978 will require no less than $15 per square foot of repairs over the course of the first year, the vast majority of which will have to be done in front.  Then, assume $1 - $2 per square foot going forward at some kind of  steadily increasing rate.  For instance, assume that in year two you will need $1.50 per square foot, and  tack on an extra $.50 per square foot for each year thereafter.  For properties built after 1978, assume a minimum of front of $10 per square foot in immediate repairs required.

I should also point out that while one or two dollars per square foot may not seem like a lot, most multifamily properties can be upwards of 4000 – 5000 square feet.  So I can add up quickly and provide a very nice buffer zone.

Every individual investor will have their own methodology for calculating expenses.  Some people include their financing costs, some people include capital expenditure as a percentage of gross rental income (I never found this one reasonable since usually higher-end properties that command higher rent are treated better and cared for better than lower rental income properties), and then there are some people who assume that your expenses are limited to taxes, insurance and owner-paid utilities.  There is no right or wrong answer, is ultimately up to you and how much of a buffer against unexpected costs you want to have.  

Lastly, even if there was a fool proof method to estimating all your expenses, there is no way to predict the human element.  What sort of damage or issues a tenant could inflict is incredibly difficult to foresee. 

I know this wasn't the answer you're looking for but I hope it still helps somewhat.