Multifamily Operating Expenses: A Complete Guide

Operating expenses are the costs associated with managing and maintaining and operating a multifamily property. These expenses are essential for the day-to-day operation of the property and are deducted from the rental income to calculate the property’s net operating income (NOI).

Let’s dive into exactly what these operating expenses are and how they are used in commercial multifamily apartments.

Repair and Maintenance

Repair and maintenance come as one of the multifamily operating expenses. Repairs and maintenance items include fixing broken appliances, toilet issues, replacing light bulbs, and repairing small day-to-day items.

Keep in mind this does not include large capital expenditure (capex) items like replacing the countertops or HVAC systems.

Usually, you will have more significant maintenance expenses if you own an old building or property; this is because older properties tend to have more issues than newer ones.

Contract Services

Contract services are the recurring services needed to operate the property. This includes snow removal, pest control, internet services, and cleaning expenses. These are usually signed contracts with third party companies, hence the name contract services.

Turnover or Make-Ready

The turnover or make-ready expense for multifamily properties refers to the cost associated with preparing a rental unit for a new tenant after the previous tenant has moved out. These expenses can vary depending on several factors, including the size of the unit and the specific maintenance needs of each unit.

Turnover expenses typically include cleaning, miscellaneous repairs, painting, and could even include replacing carpet or flooring.

Landscaping or grounds

Landscaping or grounds is the monthly expense to mow the grass and upkeep the grounds. This can include snow removal and any miscellaneous costs associated with landscaping. Since landscaping is a reoccurring monthly charge, this could even be classified as a contracted service.

Payroll

As a property owner, you will most likely have several people who work as staff on your property. These staff may or may not include;

●      Property managers

●      Maintenance workers

●      Front desk personnel

●      Leasing agents

The number of your staff will vary, depending on the market, size, and type of property you own. Payroll is the operating expense item the property pays for all of the staff salaries. Keep in mind, this does not include the property management fee.

Marketing and advertising

Simply stated, the marketing cost includes online advertising costs from places like Apartments.com, Zillow, and Rent.com.

The marketing cost for multifamily properties varies based on factors such as location, property size, and marketing strategies.

General and Administrative

General and administrative costs refer to the operating expenses associated with the day-to-day management and administration of an apartment complex or rental property. These are related to office supplies, furniture, computers, software, and other equipment necessary for property management and administration.

Security

Security is an expense property owners will only have if needed. Security can include on-site security guards to patrol the property or a security camera system.

Utilities

Utility expenses for apartments typically include the costs associated with providing essential services such as electricity, water, gas, and other utilities to the residents. These expenses are a significant part of the operating costs for apartment buildings.

Here are the common utility expenses for apartments:

Electricity: This covers the cost of electricity to power common areas such as hallways, outdoor lighting, and shared facilities like laundry rooms, as well as any electricity used in vacant units for lighting and maintaining the property.

Water and Sewer: The cost of water supply to the apartment complex, along with sewer and wastewater removal expenses. These are usually based on metered usage or allocated based on factors like the number of units.

Gas: The cost of natural gas or propane, if applicable, for heating, hot water, and cooking in the apartment units.

Trash: The cost to have a trash company service the on-site dumpsters at the property. Some property owners include trash in contract services but it can also be considered a utility expense.

Property Management Fee

The property management fee, typically a percentage of total collected income, is a fee that goes directly to the property management company. This company will manage the daily operations of the complex, handle the leasing, collection of rent and turns, and so on. Keep in mind, this does not include the payroll expense for the on-site staff. The property management fee percentage will vary based on the market and size of the property.

Insurance

Insurance is the costs associated with insurance coverage for a the apartment complex. Insurance is a critical expense for property owners and management companies to protect against potential risks and liabilities associated with property ownership.

Real estate taxes

Real estate taxes, often referred to simply as property taxes, are taxes levied on real property, such as land, buildings, and other improvements, by local governments. These taxes are a significant source of revenue for municipalities and are used to fund essential public services, such as schools, police and fire departments, infrastructure maintenance, and other local government functions.

Real estate taxes are often the most significant multifamily operating expense you will incur. How property taxes are calculated will vary on the specific county the property is located in.