Posted by Mike on March 07, 2009 at 04:31:54:
This is why you make low offers, its a numbers game but you will be lucky to get 1 property at 50% or less out of 120-250 offers.
Is Prop Mgmt an Expense? - Posted by completenewbie
Posted by completenewbie on February 28, 2009 at 21:30:07:
Is it customary to include property management fees as an expense when computing NOI and cap rates? The reason why I ask is I noticed that many times, a listed property’s cap rate does not take into account property management fees (even when it is under professional property management)…so cap rate appears higher than it really is (unless that is customary?)
Re: Is Prop Mgmt an Expense? - Posted by Steve
Posted by Steve on March 03, 2009 at 09:40:18:
Yes! absolutely it is. Sellers will often try to leave this out, among other things. Another thing I see are folks that are running their properties with poor self-run management or low budget alternatives to what really needs to be done. They are in denial about what it really costs to run a property like this properly. They will show you several years history at 35% expense/income ratio, and often this is because of their low budge property management. In that case the seller is not even trying to pull a fast one on you. They have been running it that way and expect that you would run it that way too.
In any case, sellers will always try every little trick they can to make the cap rate look better than it really is by exaggerating income and hiding expenses. Its up to you to know to check for every expense that you know should be there and have an idea about how much it should be for your market. Before you get too far you will want to review their tax records. It unusual that they would not write off expenses, for example or over-report their income. The 50% rule for expense/income ratio is a good rough estimate, but there can be variations to that so you still need to do full due diligence to make sure everything has been accounted for. Look at their actual receipts and bank deposit records, for example.
Yes, property management is part of the expense of running that business.
Capital reserves, its not clear cut. Some people factor that into NOI and some do it after. The money has not really been spent yet. But in theory, eventually it would be.
Here is the absolute bottom line though. MOST IMPORTANT THING. Do not pay one dime more than the investment is worth to you, using the management structure, reserves structure, etc…that you intend to use to run the business and expect a certain cash flow and long term return. You know your bottom line. When you know your bottom line you can easily figure out the maximum price you would be willing to pay in order to run the property properly, YOUR WAY, and get the returns you seek. Anything over that price will cause you to compromise either your business practices or your returns. That is your bottom line. You may or may not convince the seller that your way is the right way, compared to his way. Does not matter. Negotiate towards that price and either the deal will work or you will move on to another deal that works better.
After you miss too many deals, you may have to re-evaluate your own criteria to see if your return requirements are too ambitious or your business practices too stringent. But never falter on what you currently believe to be best practices and bottom line returns. Sellers are trying to get the most they can from you. Sometimes they may try to fudge the numbers hoping to get someone who does not know any better. Sometimes they simply may be in denial themselves about the reality of running this kind of business.
Re: Is Prop Mgmt an Expense? - Posted by cam
Posted by cam on February 28, 2009 at 22:03:20:
Yes, include management fees. Realtors often leave this and such things as capital reserves out in their presentations.
Re: Is Prop Mgmt an Expense? - Posted by completenewbie
Posted by completenewbie on March 03, 2009 at 20:00:18:
Thanks for the advice.
Re: Is Prop Mgmt an Expense? - Posted by completenewbie
Posted by completenewbie on March 01, 2009 at 19:19:28:
Thanks!