Gross annual potential rents. For this figure, use the property's existing rent levels; if its current rents sit above market, use market rent levels. Verify all leases for rental amounts and lease terms. Do not use a rent figure based on your anticipated rent increases (if any). Extra income. With many properties you can charge for rental application fees, parking, storage, laundry, party room, garages, and so on. Verify all such existing income. Don't project extra income that's not been proven by past operating experience or reasonable market data.
Vacancy and collection losses. Use market vacancy rates, or the current owner's vacancies for the past year, whichever is higher. Also, when judging market vacancy rates, take your figures from the market niche in which this property currently operates. Vacancy rates may vary significantly by location, apartment size, quality, and rent level. As you compare vacancy rates by market niche, try to spot those segments that are experiencing the greatest shortages. Effective gross income. From this cash, you pay property expenses and mortgage payments. If you overestimate rent levels or underestimate vacancies, you may end up short of cash.
Trash pickup. Verify rates and permissible quantities. Look for lower-cost alternatives. Utilities. In addition to common area lighting, some buildings include centralized heat and air systems. Verify
the amounts of these expenses with utility companies. (Personal note: I would never again operate a building where apartment units lacked individual HVAC units unless the building price was extremely low or the HVAC system extremely efficient. Most older centralized systems seldom distribute heat and air conditioning uniformly. Tenants persistently complain about being too cold or too hot. ) Licenses and permit fees. On occasion, owners of rental properties are required to pay municipal fees of one sort or another. Lease-up expenses. Ideally, you will generate a good supply of rental applicants from free postings, referrals, and inquiries; otherwise, you may need to advertise.
Also, you'll probably need to pay for credit checks on potential tenants. Management fees. Even if you self-manage your units, allocate some expense here for your time and effort. Don't confuse return on labor for return on investment. Maintenance and repairs. Ditto. Enter an expense to pay yourself or others. “I'll take care of that myself" shouldn't mean “I'll work for free. " Grounds maintenance. Maintenance of the grounds entails mowing the lawn, trimming hedges, removing snow, cleaning up leaves, tending to the flower beds, and so on. Miscellaneous. You will incur expenses such as lease preparation, auto mileage, and long-distance telephone charges. Property taxes. Verify amount, tax rate, and assessed value. Check accuracy. Note whether the property is subject to any special assessments (sewer, sidewalks, water reclamation).
Step-by-Step, Affordable(under $80) Training Videos on How to Build or maintain a Powerful commercial property Portfolio, covers land, apts, multifam, retail and more!
By: Raymond Pedersen