Real Estate Underwriting OpEx Assumptions
Hello Everyone,
To give you a bit of background I'm working in acquisitions at Multifamily Value-add Owner/Operator in Manahttan. I have underwritten a few deals at this point, and want to get an idea of how other analysts make their OpEx assumptions. What I usually use is a building in our portfolio that is similar to the deal I'm underwriting. I use the vintage as my primary driver for this part of the analysis, however I'm curious about what other building characteristics people use as indicators of a good "OpEx Comp" (as we call them).
To put it shortly, what are some of the methodologies used to make OpEx assumptions (with OpEx comps or otherwise)?
-Best, Multi Fam Man
RE Taxes - assessment (based on new purchase price if higher than current assessed) and mill rate Insurance - we have an equation our insurance company uses All other expenses - similar buildings, talking to the property managers/looking at what we'll need to contract for
Early underwriting (without getting a company like greystar / alliance to give a full blown budget, or to utilize metrics from existing buildings) general rule of thumb is 25% - 35% expense ratio - depends on amenity package, services, scale of project (think economies of scale) and what rents you are achieving (if top of the market, you could push a lower expense ratio). This is inclusive of taxes & insurance.
Holy smokes is that on development deals? I've always used more like 40-55%. Maybe your taxes are under assessed or something.
Agreed, we manage 50,000+ units and we're underwriting deals in the neighborhood of 45-50%. Could be the difference between top line number in big ticket markets vs. sunbelt markets, but I doubt it.
It would have been helpful for me to give more background on where my assumptions are coming from.
My firm does ground up development in primary / high barrier to enter markets where rents are significantly greater vs. secondary / territory markets. Rents we are underwriting are anywhere from $5.00 - $8.00 psf / mo. A good portion of expenses are fixed, so once you begin to achieve higher rents, expense ratios can drop, even below 25%. I have a friend who used to work at Caruso Affiliated. Their project 8500 Burton Way here in LA is at the bottom range of ratios I quoted, partially due to the fact that their rents are so god damn high.
Got it. Thank you for sharing great info.
I also typically use $250 / unit for replacement reserves (above the line) so maybe that is part of it.
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