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Understand Expenses Based On Your Own Experience and Not on History | International Residential Real Estate Investors Association
Friday July 21st 2017

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Understand Expenses Based On Your Own Experience and Not on History

During the course of pursuing a new acquisition years ago, the seller of a property that had my attention responded to my request for historical expenses in an unusual, but in my opinion, insightful way. The seller’s response was that if the buyer didn’t understand what the expenses would be then he/she should not be considering such a purchase. You may feel this is arrogant. You may believe the seller has no right to take this position. However, in my opinion this seller in a single statement highlighted a key point that bankers and other investors can use to avoid poorly conceived multifamily investments.

The serious purchaser should either directly or indirectly know the answer to this question. No doubt there are exceptions (which by the way this seller was quick to acquiesce to including 1) utilities and 2) recent improvement costs to name a couple.

However, as a buyer, you should be able to relatively accurately assess many costs. Landscaping is a function of the acreage. Water costs are predictable and variance points to issues with the water systems on the property. Insurance cost should be predictable from the remainder of the portfolio. Painting, HVAC, carpentry, and flooring expense should be predictable based upon the property inspection. Salaries are driven by local labor costs and the type of resources your business desires to place on the property.

Additionally, choices you will make as a manager may drive costs up or down sharply. I’ve seen C class property owners routinely install carpet without a pad. While I don’t agree with practice, certainly this cuts operating costs. Paint choice can dramatically effect make ready costs. Converting to individual meter to group is another greate expense altering choice.

Other points that can effect cost are your customer service and advertising goals. These items may be significantly impacted by location. Heavy traffic locations can place significant pressure on the management staff. This in turn can lead to unplanned hiring requirements.

Finally, pooling renting resources to allow supporting more properties from a single location can have a significant effect on personnel costs.

If as an investor, you don’t have the skills to evaluate your expense profile a third party manager can be an invaluable resource for this issue. However, don’t blindly accept any manager. Ask the prospective manager to:

  1. Provide references from past managers,
  2. Provide examples of their costs for similar properties in either the current market or at other similar properties offering similar labor and physical cost factors.

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