The elephant in the room however, is expenses. How can you know the property’s cost of operation from only five minutes on the phone? Like everything else, there are general rules of thumb to help.
For years, the prevailing way to generalize apartment expenses was a percentage of the gross income. Many would say: expenses are about 35% to 40% of gross income. The problem with this philosophy is that expenses don’t always correlate to gross income. The gross income of a property could drop substantially and at the same time expenses go up.
Expenses could rise due to:
- The extra marketing required to capture potential tenants
- Extra security required to watch over vacant units
- Utilities on the rise
- Rent concessions needed
- Property taxes could elevate because…well just because
Today, a more accurate way to measure expenses is on a per unit, per year basis. Expenses generally run from $4,000 to $6,000 per unit, per year (assuming all units are separately metered so tenants pay their own utilities). If the landlord pays utilities, this expense must be added. Some properties can be run for as little as $3,500 per unit if taxes are low, amenities are minimal and the building is inexpensive to fix. Luxury properties with large club houses and plenty of amenities may be $6,000 per unit or higher. Anything less than $3,500 per unit and something is odd–either the owner has bought themselves a job and is acting as the manager/handyman, or the property is being neglected.
Again, this is all general brackets for having intelligent conversations in order to capture a deal. Fully underwriting the transaction warrants an inspection of the property, an analysis of the books and records as well as insuring a competent management team. SFG can handle all that for you once the borrower is on board.
To keep this posting brief, we made generalizations. However, this should give you the basics for a good conversation with the borrower, and help you capture more apartment transactions. Here you will find a link to our SFG 5 Minute Apartment Valuation Calculator. Everything is good to go, all you have to do is plug in the numbers for your project. Go ahead, give it a try!