Make sure you do a good job of analyzing expenses and income using the annual property operating data form, making sure nothing is to be left out. If you have a question regarding any of the expenses, ask the broker or the owner to provide them for you and to provide accurate expenses. Worse case scenario, do some sleuthing and investigating on your own. Call the assessor’s office and the treasure’s office to find out what the property taxes are.
Call your insurance agent to find out how much insurance coverage would be if you purchased this property. Call the utility companies to find out what the gas, electric, and water bills are to make sure what you are being told is right on. Call the trash haulers to find out what it would cost to haul trash from the property. Snow removal, lawn care, etc. Now, you can go ahead and do the sleuthing on your own or you can depend on the information on what the broker or the owner is given you. Please keep in mind that you’ll want to do a good job verifying these expenses on a tax return and you may as well start that process with your annual property operating data form. I’ve included sample copies as well as one example of a copy that’s been filled out for you to take a look out and use as you feel necessary.
So, when you analyze apartment properties, some things to keep in mind that can help your analysis: Apartments where the owner pays the heat, common area electricity, and water for the buildings. When you look at some apartment properties, you’re going to find some owners actually supply the heat, common area electricity, and water for the building and for the tenants to use, with the tenants being responsible for their own electrical costs. If this is the case, make sure you budget between 39-47% for expenses on the property. That’s typically where your expenses should be. Anything less than that should send up a red flag, which means just more investigation. Anything more than that, should also send up a red flag, which also means more investigation.
Apartment properties where the tenants pay all their own utilities except water. Many buildings you’ll find that tenants paying their own heat and electric, but the owner’s responsible for water and common area electricity. When you find this to be the case, your expense ratio will be between 35-45%. Once again, if your expense ratio on these properties is less than 35%, more investigation is needed and more than 45%, more investigation is needed. If it’s within that ballpark, you can have a certain level of comfort that the expenses that are being reported are probably pretty accurate.
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Jacquelyn Donner
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