In my Multifamily Owner Expenses series, the topics that have been covered are Property Taxes, Property Management, Utilities, Property Insurance, and Landscaping & Snow Removal. This week of the series is addressing all Other Expenses apartment owners might incur while operating their properties.
There are 9 other expense categories that owners should be aware of:
1. Marketing: Used to attract tenants to new units that are available for rent. This can include subscriptions to Apartments.com, printing For Rent signs, organizing open houses, etc.
2. Legal Fees: Lawyers are typically needed to assist in the process of evicting tenants. Lawyers can also often be required for enforcing lease agreements, addressing tenant disputes, and more.
3. General and Administrative: This can include expenses related to property management fees, accounting software, office supplies, and computers.
4. Accounting: It is important for apartment owners to maintain precise financial records, prepare budgets, and manage expenses. An accountant or property manager is often hired to complete these documents.
5. Contract Services: It is important to get multiple quotes from third party contractors if hiring for repairs, maintenance, and capital improvements.
6. Turnover: Expenses related to getting a unit ready to be rented again once a tenant moves out and can include cleaning, repairing any damage, paying utilities in the unit while it is empty, and advertising for new units.
7. Payroll: Includes paying maintenance workers, front desk personnel, leasing agents, and others.
8. Capital Reserves: Owners should set aside a portion of income for capital reserves to reduce risk and address major capital repairs or improvements when needed.
9. Repairs/Maintenance: This includes fixing appliances, repainting the units, replacing light bulbs, fixing leaks, etc.
Several of these expenses can be connected with each other. One example is the property management fee may include the marketing, administrative, and accounting expenses. Turnover is another example that can be included with repairs/maintenance.
It is important to note that capital improvements are a capital expenditure rather than an operating expense. Operating expenses are tax write-offs for the year they are paid for. Capital improvements are added to the basis of the property and can be depreciated over the life span of the property, which is 27.5 years for apartments. Cost segregation can be used to accelerate depreciation for certain capital improvements (please consult with your tax accountant for more information and advice).
Apartments, on average, run between a 35-45% expense ratio. Some older buildings can run closer to 50% if they run on a boiler system or if all utilities are included in the rent. Brand new apartment complexes run at a 28-32% expense ratio. Every owner runs their apartment complexes at different expense ratios.
It is important to remember that the majority of the buyers are going to underwrite each deal differently. A property that may appear as a 6.5% cap rate on an offering memorandum might actually be a 5.5% cap rate to a buyer due to underwriting increases in property taxes, insurance, and property management fees if an owner self manages. Reach out if you would like to discuss operating expenses further.
SVN Cornerstone Multifamily
Jordan Lester is an Associate Advisor with SVN Cornerstone. Jordan served as a brokers assistant for 3 years with SVN Cornerstone before becoming a full time broker. Jordan specializes in the multifamily sector of commercial real estate. To get in touch with Jordan, email jordan.lester@svn.com or call 509.496.6922