Posted by James R. Cundiff on October 28, 2007 at 01:05:07:
If the goal of finding an apartment building expense ratio is to determine if expenses are reasonable for a particular building, why not check out IREM’s (Institute for Real Estate Managements) annual survey of income and expenses. The publication will compare like buildings to similarly situated ones.
Apartment Building Expense Ratio - Posted by Ron
Posted by Ron on October 23, 2007 at 14:22:17:
What can I expect the total operating expenses to be on a “fixed up” building with a property management company? I just want a ball park figure. A percent of EGI or GPI. I have heard 40% of EGI (from a very successful RE Investor in NY). Wanted to know what you thought.
Re: Apartment Building Expense Ratio - Posted by Josh
Posted by Josh on March 06, 2009 at 20:07:06:
How much will it be to build a building from ground up?
Re: Apartment Building Expense Ratio - Posted by Andy
Posted by Andy on October 26, 2007 at 20:12:22:
Hey Ron,
I dont have an answer to your question but I would like to piggy back another question on this same topic.
One thing I dont understand when someone is using a rule of thumb for expenses is why they would try to estimate total expense as opposed to expenses exclusive of RE taxes and Insurance. Taxes and Insurance are so easy to verify in the beginning, why make your estimate of expenses even less acurate by not getting accurate tax and insurance numbers in the very begining?
For example, lets say your looking at a property that has $100,000 per year in income and your estimate for total expenses is 45% or $45,000 per year leaving $55,000 in NOI. Why make this estimate when you could just as easily calculate a more accurate estimate of NOI by taking $100,000-30%(estimate for repairs and reserves)-$9,000(RE Taxes)-$7000(Insurnace)=$54,000(NOI). The 2nd calculation of NOI seems just as quick and easy as the first calculation but more accurate.
Bascially, why try to estimate total expenses when we could just try to estimate part of the total expenses and quickly verify the taxes and insurance?
I understand these estimates are no substitue for a thorough verification of the properties income and expenses from tax returns.
Re: Apartment Building Expense Ratio - Posted by Nate(DC)
Posted by Nate(DC) on October 23, 2007 at 16:21:31:
It really depends on the building and the market. For example, a building which has utilities included is going to have a higher expense ratio than one which does not. Also, it depends on the rent level of the building. You might have buildings that cost about the same to operate, but the rents are very different (say, one is in a better area). This would give you a very different expense ratio even if expenses are the same in the two buildings.
To figure out total operating expenses, you really need to look at each expense and figure out about what it is going to cost you. The expense ratio should merely be a “gut check” but should not be used as a substitute for doing your own research.
Re: Apartment Building Expense Ratio - Posted by ryan
Posted by ryan on October 07, 2010 at 09:38:47:
Are you estimating market value of that income producing property, or attempting to estimate the business value of that property?
Many jurisdictions have property taxes that change based upon a transfer of ownership - investors in these markets know this and will take it into account.
Further, much like residential insurance can vary based upon the applicant’s credit history and claims history, so too can a commercial property’s insurance expense.
Re: Apartment Building Expense Ratio - Posted by Eric in FL
Posted by Eric in FL on October 30, 2007 at 20:13:43:
Andy,
I can give you a watered down answer pertinent to the markets I work in and I think your question has alot of merit. In Florida until recently we have dealt with the most aggregious tax gouging mentality that has ever existed. I have had several properties triple in property tax values in one year because “that is what it’s worth” after it is purchased. So that is a variable that exists in several states and markets. I believe that is why several investors try to grasp the concept of total expense value with a huge fudge factor. As an investor told me with several years of experience “there is always 20% more behind every door when you choose to open it”. I always remember that. Hope this helps.
Best Regards,
Eric
Re: Apartment Building Expense Ratio - Posted by Ron
Posted by Ron on October 23, 2007 at 16:36:02:
I know that I need to get actual numbers for the particular building. However, I will be making “blind offers” on properties that are not listed for sale. So when I make the offer I don’t want it to be too low. I do not mind if the offer is too high because all offers are contingent on due diligence of the financials. If the expenses are higher and income is lower I will negotiate from there. I just want to get to that point and not get the offer turned down on the first go around.
Re: Apartment Building Expense Ratio - Posted by Don
Posted by Don on November 24, 2007 at 08:06:46:
I have building where the ratio is from 11% to 55%. I’ve had people approach me and insist that the expense ratio was 40%, because somebody told them that or they read it in a book or went to a seminar. since most of my properties are below 40%, that assumption would present a distorted estimate of value.
The 3 biggest factors imho, are the age/condition of the property, vacancy and how many of the utilities are paid by the owner. Obviously the least expenses would be for a buildign that is new or nearly new, never vacant and the tenants pay all utilities and maintenance.
Re: Apartment Building Expense Ratio - Posted by Nate(DC)
Posted by Nate(DC) on October 23, 2007 at 19:23:55:
Rather than making a blind offer you expect to retrade, why not approach the seller with an expression of interest in purchasing the property without a stated price? I think it’s probably more likely to get you taken seriously.
Re: Apartment Building Expense Ratio - Posted by James R. Cundiff
Posted by James R. Cundiff on October 27, 2007 at 20:10:32:
I have never used it but the Institute of Real Estate Management (IREM) publishes a book annually with typical expenses for different type buildings in locations throughout the U.S. IREM is part of the National Association of Realtors and is headquartered in Chicago. Maybe someone else can fill in the details on this.
Re: Apartment Building Expense Ratio - Posted by Ron
Posted by Ron on October 24, 2007 at 11:25:12:
Yes that is the plan; to call the seller and express my interest in purchasing the building. However, I want to have some idea of where I am willing to go in price, my limits. So if the seller is willing to look at the possibility of selling the building I can move quickly.
Re: Apartment Building Expense Ratio - Posted by Hart
Posted by Hart on October 24, 2007 at 09:54:16:
45-50% of GOI is a more conservative/realistic figure for a building’s expenses.
That figure should/could be used regardless if utilities are included in rent, B/C rents should/must be higher if utilities are included - therefore the 45-50% figure for expenses still holds true (in theory).
Of course, each building is a little different - but these figures are pretty reliable (especially if the building is getting near-market rents.