Posted by JPiper on June 08, 1999 at 16:21:32:
The usefulness of continuing the thread stems from what appeared to be the wide discrepancy between “actual” numbers for expenses, and an estimated number. It appears that you have cleared this up by lowering the cap rate that you initially used?..meaning that your expenses are higher as a percentage of gross. Further, when you start adding in deferred maintenance that sends the monthly expense number still higher.
Just to point out?I had the exterior of a 3 unit building painted last summer. Cost was about $2100?.and was the middle bid. Perhaps in Arizona a roof can be put on for $1K?.but that certainly wouldn’t be true here. I’m currently getting bids for a roof on the same 3 unit building. So far low bid is $3800. High bids are in the range of $5500. Bottom line is that when deferred maintenance number are added to an expense figure of 28% you obviously are going to get numbers in excess of 30%.
I don’t have a problem with using actual numbers. However when you’re analyzing a larger number of properties, using an estimate is one way to accomplish this. It gets you in the ball park?.albeit a conservative one.
I’m also not concerned with your deal. You evidently are confident in it?and are comfortable with your numbers?.and you’re the only one who needs to be satisfied. Certainly I don’t. We’re all just expressing viewpoints here.
In my case I’m going to use an estimate of 40% for expenses (plus deferred maintenance) on the average property. I use higher estimates when I’m dealing with older properties, because deferred maintenance is going to be considerably higher?.and including things like upgrading plumbing and wiring. Once the deal fits within my parameters, then I may take a look at constructing actual expense numbers. I don’t take a broker’s word for this though, nor do I take the word of the seller or his tax return. I can get utility expenses as an example by calling utility companies. I can get management expenses by calling property managers. Again, what I find repeatedly is that when I reflect deferred maintenance the expense number is going to approach 40%. A number I might add that is not 15-20 points higher than your own actual numbers plus a number for deferred maintenance.
One other point. I used to broker apartment buildings at one time?.and put partnerships together that acquired them. EVERY large apartment project that I can recall had expense numbers of at least 35%?.perhaps higher, depending on age, management costs, condition of the building, etc. It should be clear that a small income property tends to operate at HIGHER expense rates than a larger project does?.just from the economies of scale. I’ve seen brokers play with expense numbers, but even there they normally ran 32%?.and we in the industry recognized those as lowballed expenses. I might add that several months ago I spoke with a commercial lender out of Californai regarding a large apartment project in the midwest. This lender was estimating 45% expenses in their evaluation of whether they wanted to make a loan.
Good luck with your deal.