TheLandlordBlog.com

Mon 28 Aug 2006

5 Responses to “Expense Ratios on Multi-Units”

1. Natalie Says:
   August 28th, 2006 at 9:40 am

   “I’m evaluating a 6-unit property. The gross rents are $3,000 per month and the expenses are $1,200 per month. Do the expenses seem high to you?”

2. anesia.springborn Says:
   August 28th, 2006 at 9:48 am

   Great question Natalie. A good rule of thumb to use when evaluating multi-unit properties is that the operating expenses, including property managment and excluding the mortgage payment, should be about 40% to 45% of the gross rents on a monthly basis.

   For your property, the expenses are $1,200 and the gross rents are $3,000. This gives you an expense ratio of 40%, which is right on the low end of the normal range.

   Of course your expenses will be lower on a newer property or one that’s been recently remodeled with deeper than cosmetic updates.

   When evaluating a property, if you find that the expenses are lower than 40%, you have reason to be suspicious. It could be a sign of deferred maintenance or that the seller is not disclosing all of the expenses accurately. You want to be sure and verify all the numbers and conduct a careful physical inspection of the building.

   You can also do some quick math to estimate your monthly cash flow. If your gross rents are $3,000 and your expenses are $1,200, this leaves you $1,800 to pay your mortgage payment and yourself. Deduct your estimated mortgage payment from $1,800 and you have your cash flow.

3. Bruno Says:
   August 29th, 2006 at 5:31 am

   Hey Anesia.
   Interesting reply.
   Here in Quebec where I’ll be investing, the average cost is around 30% to 40% or 70% to 80%, according to studies made by the Canadian Mortgage and Housing Corporation.

   It is not clearly defined what the 70% to 80% implies though, and I was wondering what your take would be on this, as it seems excessive in a RE market.

   Thanks !

4. anesia.springborn Says:
   August 29th, 2006 at 9:58 am

   Bruno,

   I’m not sure what they could be referring to in the 70-80% for expenses. Certainly if your operating expenses are this high, you’ll be upside down pretty far. Your mortgage payment will typically be much higher than 20% of your gross rents. Think of Natalie’s 6-unit. Gross rents are $3,000 and her mortgage payment would certainly be much higher than $600 unless she found an incredible steal or unless she puts a huge amount down.

   If they are accounting for the mortgage payment within the 70-80%, that would mean that actual operating expenses are unrealistically low, and that leaves you 20% of gross rents as cash flow, which would also be outside of the norm (too high). Sure you can find buildings that would match these and any other scenario, but I can’t imagine either being “average.”

   I would suggest finding the studies you refer to and digging into the percentages to see what they reflect. Of course I don’t know the Quebec market so maybe it makes perfect sense!

5. Bruno Says:
   August 29th, 2006 at 2:51 pm

   I don’t think Quebec’s market is much different than any other markets across america, that’s why it puzzles me so much.

   One thing is that it is almost the norm for the landlord to pay for electricity/water/heating, and sometimes, even furnish the unit (and add all these costs to the monthly rent). So I guess that might be why their “operating expenses” could be so high. I really don’t know, but thanks for your reply !

Leave a Reply

You must be logged in to post a comment.