Are You Gonna Pay for That?
I know, I know, it’s absolutely confusing. Why does property A have expenses totaling 8% of the gross while property B has 38%? Why isn’t this calculation standardized? Both are hollow-tile walk up buildings, both are located in the same area, and both have the same utility services. The answer is simpler than you think: both are also self-managed.
Property A’s owner has provided the following expenses: water/sewer, insurance, common area (CAM) electric, and I’ve found and verified the existing real property taxes for her. I’ve also extrapolated the general excise taxes due based on the gross income. But the owner for Property A hasn’t taken into account:
legal fees for evicting problem tenants
repairs and maintenance
Plus Property B has hired a bi-weekly trash service for its tenants and they’ve hired a landscaper to come once a month to trim the hedges. This owner has also spent money on coin-operated laundry for its tenants, which adds to her CAM water and electric bills, but also offsets those expenses with a couple hundred dollars per month in income.
Furthermore, some of the included expenses should not be in expense column because they don’t apply to the Net Operating Income. Property B’s owner has included capital expenditures like major renovations, painting, new roofing. These should not be included on an operating expenditure sheet even if the owner did them recently. Why? Because they are one-time expenses that happen once in a while, not things that need to be done every month, like keeping the stairway lights on. Plus, you can depreciate these expenses over time, unlike your electric bill.
A standardized calculation for allowable expenses of a building exists, but here in Hawaii, I don’t always stick to it because apartment building transactions aren’t something most people do on a daily basis. But I do. Part of my job is to help you put the right items on your expense sheet and correctly categorize the new doors you installed last year. And I will help the banks to understand the proforma income and expenses, so that the appraiser can see the value, too. When you’re buying a building, I’ll help you spot missing expenses and find hidden ones. Contact me today to talk about apartment buildings and the Hawaii rental market at 808-429-1098/ CIS@ChristinaDwight.com