There is a lot of misconception when it comes to financially underwriting real estate assets. Due to this, investors often end up making gross mistakes. That’s why it’s important to identify the various operating and capital expenses, as well as the differences between the two. Today, we will dive into your five biggest operating expenses for multifamily investments and some common tips we have for handling them.
Operating Expenses 101
There are a lot of different operating expenses. Each differs depending on what type of assets you’re looking at, which we will dive into soon. Before, let’s define interest expenses and why they would not be considered an operating expense.
“An interest expense is the cost incurred by an entity for borrowed funds,” per Investopedia. “It represents interest payable on any borrowings – bonds, loans, convertible debt or lines of credit.” For many investors, the most common type of interest expense is mortgages.
Operating expenses are not borrowed funds. They relate to the core operations of a business, such as the ones we outline below. Your interest expense, as well as things like depreciation or amortization, are non-operating expenses and should not be part of your overall multifamily investment operational costs.
Instead, these five expenses would be your biggest operating expenses:
- Property Insurance – This differs in various ways. One of the ways is whether the property has had a loss. This will significantly affect the value of that particular property. You should not take property insurance at face value. You should always make sure that property is not under or over insured.
- Real Estate Property Taxes – It is important to know the current value of the property to determine the amount of tax you are expected to pay for it. This tax increases as the property increases in value over time.
- Property Management Fees – You need property managers to take care of your property. These managers are involved with various activities like leasing, marketing and the general maintenance of your property. Typically, this fee should be around 6 to 7% of the total income.
- Repairs and Contingency – There is a difference between routine maintenance and capital improvement. Capital improvement involves significant expenses like replacing roofs or painting the entire property. Such expenses are not included in the operating expenses. Operating expenses are those that enable you to run the property like electricity and minor painting.
- Utilities – You have to determine who, between the landlord and the tenant, is paying what particular utility. Tenants can pay for their own electricity, while the landlord pays electricity for the common areas. Utilities should be around 4% of the total operating expenses.
When taking these operating expenses into consideration, you can have a better handle on your overall investment.
Power of the Plus
Beck Partners not only provides you with a full scope of services covering Commercial Real Estate, Insurance and Property Management, but we give you the Power of the Plus: a wealth of business expertise. From the little questions to the most important decisions facing your business, Beck can lend you the advice you need to travel along a path of exponential growth.
Our difference is immeasurable. We go far beyond sending you a helpful email. You will have everything you need to meet your business goals within one, valuable partnership with Beck. From your leasing to your personal insurance, you will be covered every step of the way, including on-hand advice from experts who have been in your shoes.
Don’t wait. Get the Power of the Plus on your side with a simple phone call. For more information, you can reach out to Chris Cobb, a Beck Partners Associate, at (850) 477-7044 or via email email@example.com.