What's a true OPEX ratio for a 10 to 15 units property?

[Albert Lubin]

Hi, I am a new investor and I'm contemplating buying a commercial property to hold. I've been using the general "50% of EGI" rule to analyze properties but I am curious what a "true" range is. I do have some questions on the general 50% rule too. Is there an assumed percentage already embedded there for property management, CapEx and repairs? Or would those be on top of the 50%? Please advise, thanks!

[Ty Coutts]

Hello, Albert Lubin, the 50% rule is a general guideline used by real estate investors to estimate the operating expenses (OpEx) of a property as a percentage of Effective Gross Income (EGI). Effective Gross Income is the total potential rental income minus vacancy and credit loss. The 50% rule states that approximately 50% of EGI will typically be consumed by operating expenses.

While the 50% rule provides a quick estimate, actual expenses can vary widely depending on the property type, location, age, condition, tenant mix, and market conditions.

Here's an example: if a property generates $200,000 in EGI per year, the 50% rule suggests $100,000 would go towards operating expenses like taxes, insurance, utilities, and property management. However, an additional amount should be set aside for CapEx and repairs.

While the 50% rule provides a useful starting point, it’s essential to recognize that it primarily covers operating expenses and not CapEx or repairs. For a more accurate financial projection, factor in these additional expenses separately. Tailor your analysis to the specific property and market conditions to make informed investment decisions. I hope this finds you well!