Operating Expenses Estimate Too High?

[Mark Beekman]

When I find a promising multi-unit rental property, I usually assume that 50% of the gross rents is what I'll have after operating expenses to pay my mortgage. The listing sheets have a breakdown of the operating expenses; should I go by what they have or assume it's 50%? I don't want to overestimate the expenses too much.

[Bryan Hancock]

Originally posted by Mark Beekman:

When I find a promising multi-unit rental property, I usually assume that 50% of the gross rents is what I'll have after operating expenses to pay my mortgage. The listing sheets have a breakdown of the operating expenses; should I go by what they have or assume it's 50%? I don't want to overestimate the expenses too much.

50% is a perfect screen test and is easy to do in your head. It is generally closer to 45% if you include management, capex set-asides, maintenance, economic vacancy, etc. Most of the broker submissions are coked up fantasy-world assumptions. Take their submission with you to the bathroom in case you run out of toilet paper.

It always baffles me to see someone with CCIM or some other high-brow designation after their name passing off some crapola underwriting example for a complex. These people should be immediately stripped of their designation IMO. I am all for them working on the behalf of their clients and trying to get top dollar for the asset, but outright bsing on the financials is borderline fraudulent in my book.