The 3 Largest Expenses In Multifamily Operations

When it comes to multifamily operations, management of net operating income is key to creating value. Aside from optimizing income by increasing occupancy and getting to market rent levels, management of expenses is also key. Below are the three largest expenses in management of multifamily assets.

Repairs/Maintenance

Repairs and maintenance can be costly, especially when the property has a lot of deferred maintenance. If not properly accounted for and mitigated, repairs and maintenance can get out of control, eat into cash flow and be a threat to the business plan.

One way to mitigate repairs and maintenance expense is through thorough due diligence prior to the closing. Ensure to have a great inspection and hire other professionals, such as plumbers, electricians, etc. , when there is an item of interest that can potentially be a costly repair. Secondly, raising enough capital to cover necessary capital expenditures will also help to avoid costly repairs down the road.

Utilities

Utilities can be costly to management if the tenants are not paying individually. If an asset does not have individual metering, owners often pay for utilities and cannot pass the bill back to tenants. As a result, utilities can be a costly expense for management of certain properties. One way to address this is utilization fo the Ratio Utility Billing System (RUBS), which allows owners to individually bill residential units for these costs and save on operational costs.

Taxes

Taxes can be a surprise if not properly accounted for. Also during due diligence, this is the time to ensure that taxes disclosed by the seller are realistic after the sale. Many counties choose to reassess taxes after closing, which means that as soon the property closes, higher property taxes may be assessed. During due diligence, it is important to reach out to the county tax assessor and understand how often taxes are assessed to identify and properly account for this risk.

When managing multifamilies and apartments, identification and management of the largest expenses is just as critical as raising income. Both influence net operating income and the value of the property, which is critical to the success of the business plan and achieving targeted returns for investors.