The Operating Expense Ratio of apartment complexes can range anywhere from 25 to 50 percent (or higher) and is greatly affected by the building’s age. Before investing in an apartment complex, it is imperative to figure out whether you are actually getting a good deal or not. Predicting your operating expenses for the year is important to help you create an accurate budget and identify areas where you can increase income and decrease spending.
1. Historical Cash Flow Data
The sales listing brochure of an apartment building will typically list the operating expenses of the property in broad categories such as Taxes, Utilities, Insurance, Maintenance, Administrative and Property Management. This should give you a rough indication of what to expect for the coming year.
However, just like the bank, you should ask to see the historical cash flow figures for this property for the past two years to get a more accurate prediction. Take a look at the two years and compare the increase in expenses from one year to the next while remembering to take inflation into account when doing calculations.
2. Compare to Other Properties
Find at least five other property listings that are similar to the apartment complex you are looking at and ask for their property listing data and operating expenses. The operating expense data will give you an indication of the baseline for typical operating expenses in the current market.
Another useful source to get a baseline from is the NAA Survey of Apartment Operating Income and Expenses. Comparing the property to others will not only give you a more accurate prediction for the coming year, but it will also help you identify possible problem areas.
3. Do Your Own Calculations
As soon as an apartment complex changes ownership, certain changes can affect your expenses in a big way. These can include taxes, insurance, property management, maintenance, repairs, and utilities.
For example, the property will be reassessed in most states after you purchase a complex and taxed based on the new value. This means that instead of looking at past figures, you should use your purchase price to estimate the taxes you’ll be paying. With insurance, you could also get a better deal using your own insurer instead of the one currently used by the complex. With property management, you can check to see if better deals are available from different companies.
You can use different methods to predict an apartment complex’s operating expenses for the coming year. In doing so, always try to get the most accurate data and compare your results to a baseline.
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