It is not uncommon for the expenses on a multifamily property to consume 50%+ of the income on a given property. Reducing expenses is one of the most common business strategies to increase NOI on a property and thereby its value. Whether you are an active or passive investor, it makes sense to have a strong grasp on the expenses commonly seen on multifamily deals. Today's article looks at many of the expenses often encountered on a property's P&L statement and discusses some of the things you should considered when reviewing them.
What are the common expenses?
Advertising: The world of leasing apartments is a sales business. In the world of sales it is certainly important to offer a product of value if you want the consumer to choose your product instead of another. However, you can have the nicest product in the world (in our case an apartment unit) but if no one hears about it you won't be able to make a sale. The advertising line item on the multifamily P&L addresses this reality. The amount of money needed for advertising depends highly on the property and market. A competent property manager should be able to provide guidance on a marketing plan that will be successful for your project.
Contract Services: Contract services account for the ongoing work that must be completed on a property that a property manager is unable to perform. Examples could include landscaping, pest control, pool maintenance, or components in turnover such as painting. The specific items under the umbrella of contract services will depend on what your property manage is capable of doing for your property. For example, perhaps your property manager can take care of the pool maintenance but does not have the ability to cut the lawn. It is important when looking at purchasing a property to understand what items are covered under the contract expenses and what might be added or taken away with the property manger that you select.
Utilities: Common utilities on a multifamily property include electricity, gas, water, sewer and trash. When looking at this expense item on a P&L its important to understand the full picture of how utilities work on the property. Is electricity paid for directly by the tenants, billed back to the tenants or completely paid for by the property? The same question can be asked for water and trash. Understanding this story not only helps to predict the expenses that you will have on the property but also to see potential for expense savings (such as water conservation) and the ability to charge tenants for some of the utility expenses (through a fee or RUBS).
General/Admin: This is perhaps one of the most ambiguous expense line items. This is due to the fact that a plethora of items are often placed under this umbrella. Commonly office expenses, internet, legal fees, subscriptions and many other things are contained within this one line item. Once again, it is crucial to ask your selected property manger what expenses fall under this category and what their projection is for your property.
Insurance: Insurance cost various greatly on multifamily properties. Location, vintage and construction style all play a role in the ultimate quoted price for insurance. Having a competent insurance broker on your team is crucial to finding a policy that is competitive price wise and also provides the coverage that you will need.
Real Estate Taxes: Property taxes like insurance also vary greatly depending on the properties location and vintage. States such as Texas are known for having high taxes and can increase drastically from one year to the next while other states like Arizona are much more reasonable with their tax levels and assessments.
Management Fee: The management fee is the charge a property manger has for their oversight of your property. It also includes a number of recourses such as accounting, marketing plans and other important items. Typically, on a smaller property this fee will be higher and could reach upwards of 10% while on very large multifamily (200+ units) it could be as low as 3%.
Payroll: This is the salary cost for the personnel who work at your property. This could include a manager, leasing agent, maintenance technician and others. It's important to understand that this cost is not only for the payment that these individuals receive, but also for costs such as taxes and insurance associated with their position.
Repairs and Maintenance: The cost for repairs on maintenance on a property are primarily a function of the property's age and renovation level. A property that is newer will obviously have less maintenance as well a property that is slightly older but has recently been updated.
Turnover: Although sometimes lumped into the R&M expense line item, turnover is very useful to separate as the amount of turnovers will change as you progress through your business plan. Turnover costs can include cleaning, painting, pest control and flooring that must be completed in preparation for the arrival of a new tenant. When units are being drastically renovated as part of a business plan it's common to list these costs under capex instead of an individual expense line item as well.
Why is this important?
Having a clear understanding of the expenses on a multifamily property is crucial when analyzing an apartment deal both as a general partner and a limited partner. The overall message of this article is that expense are property and market depending and understanding the full story is paramount to the success of the business plan. The property manger should be used as a resource when analyzing these expenses but ultimately they must make sense in light of all the variable that are at play.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.
