What is the typical range of operating expenses (as a percent of gross income) for multifamily properties?
-Greater North Dallas Area
First, remember that gross income in the multifamily rental business isn’t really the rent times the number of units. You have to take vacancy rates into account as well. That’s going to shave revenue right off the top.
According to our data (AllPropertyManagement.com), the average vacancy rate in Dallas is 8.2 percent. Be sure to account for that and more when running your projections.
Will you have a property manager living on site? Scratch one unit for free or discounted rent to compensate the on-site manager. Even if it’s you.
Some Things to Keep in Mind
Beyond that, things are going to be highly variable.
If you have a property manager running things for you, expect to pay between 10 and 20 percent of gross revenue. Possibly more, if the scope of engagement is broad, and you have few units to amortize costs across.
You should have an attorney, of course. Expect to pay a couple of hundred per month in retainers, minimum.
Got landlords’ insurance? Those premiums will be all over the map, but it’s easy enough to get an estimate from an agent. It’s a necessity in today’s litigious world. It’s generally more expensive to get a landlord’s policy on a unit than a homeowners’ policy – by as much as 25 percent. Take that into account.
You’ll also want basic property insurance, “rent loss” insurance, general liability insurance, flood insurance, fire insurance and possibly tenant relocation insurance.
You’ll need to clean out and fix up the unit each time a tenant moves out. You can easily spend a grand each time around in painting and new carpet. If your average tenant stays two years, that averages out to $500 per year per unit.
Maintenance costs are going to be hugely variable, because they are highly dependent on the property itself. Is it old? Has a lot of maintenance been deferred (i.e., just not done?) Assume the worst. As a starting point, though, Fannie Mae suggests planning on spending 2 percent of the property’s value per year on maintenance. That is, a $1 million property would generate about $20,000 in maintenance costs. (My personal spidey-sense says to double that.)
Another rule of thumb – perhaps more relevant to apartment building owners – suggests budgeting 1.5 to 2 times the monthly rental rate each year for maintenance costs. That’s just maintenance – that doesn’t get you to capital improvements, and that excludes make-ready costs to get a unit ready to rent to a new tenant.
Don’t forget property taxes. The estimated tax rate for 2014 in Dallas County, Texas is 0.6538 percent of the assessed value. However, individual cities within Dallas county can add tax of their own. You can search for the current assessment on the property at the Dallas County Assessor’s office, as well as find the rate for your city here. The Zip Code you gave us is actually in Collin County, though, in McKinney. The 2013 tax rate in McKinney City was 0.585500.
Looking up a property in the McKinney Independent School District, within McKinney City, with no special zones and no exemptions, and guessing a $1 million dollar value for the property, I came up with an estimated tax of $24,930 per year using Collin County’s property tax calculator. That’s obviously just a guess though, not knowing your address or the actual value of the property. You’ll have to run your own numbers on that one.
Got landscaping? A standard lawn is $35 – $40 per mow. You’ll need more than that for most places, though, given gardening and weeding and beautification and maintenance. One contractor we’re familiar with charges $35 to show up and $50 per hour.
Clear as mud?
That’s a lot to keep track of, and so much of it is so specific to a given property that it’s ultimately going to be up to you to plug the numbers in.
Advice from a fellow Landlord
I did turn to a veteran individual landlord, Pamela Melusky for her experiences. Pamela currently owns a six-family rental property herself, but at her peak, she had six buildings with 36 units in all (two of them were 6-family units, the remained were three-family units).
“What can you reasonably get for rent for each apartment, then for all the apartments in the building? That’s your gross. Then, subtract the following:
- PITI (that’s principle and interest of your mortgage payment, taxes and insurance)
- Property maintenance person – to put out the garbage bins, cut the grass, police the property, etc. (I pay $50/month).
- Owner’s electric
- Owner’s water bill
- Emergency money (I put aside $200 per month for that)
Add all that up and subtract from gross.
But take note: She also writes,
“Since my time has value, if I can’t see at least $1500 net out of that each month, then I don’t purchase the property.”
This figure she reserves for herself is part of what the great Benjamin Graham (and his more famous protégé, Warren Buffett, called “margin of safety.” Always build in some substantial wiggle room in case things don’t go like you projected. Because they won’t.
If all of this seems overwhelming, you might consider hiring a property manager to help you manage the tasks you’ll have as a landlord, as well as your property’s finances. And it already seems like you’re on the right track: you submitted a question to All Property Management. Check out the main website to search for a capable property management company in your area.
Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.