When purchasing a commercial multifamily building with 5-50 units, how is everyone underwriting / assessing the non-controllable operating expenses on the target property? The offering memorandums from Agents are extremely lean when it comes to OPEX and never include reserves, or in my opinion, at least adequate non-controllable maintenance expense (repairs, turnover paint / cleaning, sinking fund costs for deferred capex, etc). Pretty much, they just leave it out and claim the cap rate is 5.25%, but it’s more like 4.75% after layering in reasonable variable maintenance costs.
What % of net rental income should I assume for basic non-controllable / variable maintenance? I know it is dependent on area, property type, etc. Specifically, we are looking at Class B multi families in northern Philadelphia area (Fishtown, Brewerytown, Francisville and surrounding areas).
For reserves I am assuming $300/unit per year for value add properties.
For variable maintenance, I am assuming 7-12% of net rental income (after the adjustment for vacancy and bad debt, which totals 7.0% combined). Please note - I am excluding all items I can put service contracts to (Snow / trash removal) and utility bills (these are all easy to determine with a T12 expense statement and verifying them with the provider / city / utility company).
As for my experience, I own a 125 bedroom student housing portfolio near a major State University and have operated it for 10 years (turned heavy value add properties into luxury housing). However, this is a niche market / product and I can’t compare this OPEX when diligencing a new non-student investment in a different area.
Any help would be appreciated!! Even any good reading recommendations.
