Estimating Expenses for Multifamily Properties - Multifamily 101

Hello YouTube, we're back. It's Christian. I'm here with Brandon. We took a 1-week hiatus, so we are back to deliver Multifamily 101. If you haven't followed Brandon's channel yet, he's Multifamily Momentum, but we partner together on Tuesdays to bring you the basics. Today we're going to be talking about maintenance, actually estimating what is the cost for an individual property, because there's a whole bunch of metrics used out there. And the truth with that one line item when you're doing your analysis is it is extremely variable and property dependent. There is not one rule of thumb percentage number that's going to be right for your property. So how do we actually factor for this? Brandon, what are your first general pieces of advice when you're looking at a new property, you're estimating the expenses, how do you go about this?

You mean a new deal, right?

Yeah, new property to you. So new opportunity, you're looking to buy it, a deal that's in front of you, right?

Uh, what's, what's any deferred maintenance I can visibly see? On the property, how's the roof, how's the siding, how's the fence, and all that kind of stuff maybe. Interior, has it not been touched since the '70s, and what's it gonna take? Does it still have galvanized pipes? Does it have knob-and-tube wiring? All these things we kind of have to factor in and think about because, yeah, you can't always do apples-to-apples comparisons when you're looking at maybe a 1990s fourplex in one area and a 1920s duplex in another.

So if I'm looking at a deal and I have one of those pre-downloadable online calculators, And we love BiggerPockets, but that's probably the most popular one, but they're all over the internet. You have these calculators. They're pretty good at estimating mortgages. They're pretty good at estimating, actually quite a bit, local taxes, 'cause they're all fairly algorithmic, right? Do those work for expenses on individual property?

Yeah, again, it's too gray or too vague in terms of their estimated, price for whatever, for maintenance and stuff. I try to look at, okay, this duplex, it's 1960s, it's been rehabbed in maybe the '80s, $100 to $150 a month per unit, you know, is maybe something that they should budget accordingly. But I'm also pushing clients, like, and myself, always to have reserves, right? Start off that kitty with $5,000 or $10,000 for little surprises with a blown water heater, a furnace, a window that's blown out, or something like that too. Things like that to consider.

And does that reserve change by the size of the deal? Does that $5,000 or $10,000 count if you're buying like a $4.5 million resort? Is that enough?

Absolutely. It's going to change, right? Per unit for me is per unit or square footage. How big is the property? What does it have on it? But yeah, I say for your average Rambler-style duplex, side-by-side thing built in the '70s, maybe $8,000 or so, just if you, if you can afford it. $5,000 minimum. 8 is better. 10 is even better. Um, but if you get like a fourplex, I'd say $15,000 or so is probably plenty on that. Like for my 18-unit in Boise, I probably keep about $35,000, uh, just for, you know, surprises or maybe big CapEx things I want to take on.

And that's something that you just have to factor for because a lot of people, if you're like Cody or I, like you started with no money. So at some point, like you don't have reserves, so you got to build it up, which is why cash flow is the next most important thing. Nothing beats having cash on hand. If you have a problem, it can be fixed with money.

Right. And that cash flow goes to replenish the reserves. So if I gotta dip into that, that cash flow's there to replenish it.

Exactly. So increasingly important when you have less in reserves is that you have to buy deals that cash flow enough to refill that in a reasonable time. Just fun fact, I've never bought a building over $1 million where the septic didn't fail within the first couple months. And some of the failures were relatively small. It would be like a root incursion that we missed in an inspection in a pipe. We had to dig up one pipe or something. So it's nothing major, major. But I've not had, like, we bought that 38-plex, 4 days after close, poo started coming through 3 of the bathtubs. That is not what you want to happen. Yeah, and we bought that zero down when, I had a little bit in reserves, so we were able to, I was able to loan the LLC to float it. I was partnered with Cody Davis, who had like $17 in reserves. So you have something like that happen immediately, you need to have some game plan of how the heck are we gonna do this if it goes wrong the day after close, 'cause that can happen.

Don't let reserves prevent you from getting the deal. You guys have said that before too, right? It's better to get the deal and fund the reserves out of cash flow coming forward, but ideally to sleep best at night, you have to have something, in my opinion, have a cushion to start the kitty with.

Yeah, so let's take something like the 38 or your hypothetical 1960s build. You bought something, it's built in 1960, it does have those galvanized steel pipes. What are you actually going to do to calculate the correct reserves and monthly expenses that you need to set aside? Like, on older property, is there any rule of thumb you use? Do you just bring a contractor out there to quote it? How do you actually put together your maintenance budget?

So I take the inspection report. Yep. If we have that, right? And talk, talk to the buyer with with a contractor, talk about, okay, this is the plan going forward, this is what I want to do. Depends what they want to do with the property, right, too. What they're— maybe they have a good W-2 job that provides a lot of excess, you know, disposable income, and like, well, I don't really need to fund it too much because I get plenty coming in from my W-2. If a surprise comes up, I'm good with it, or I'll just make other arrangements. So we go through inspection report, we do make up like a punch list or plan for 1 year, 3 or 5 years. Also just If you want to just cut to the chase, like I said, on a '60s side-by-side duplex, I'd probably say $8,000-$10,000 is probably good enough. And then know that the longer you wait though, I feel like contractors are going to keep getting more expensive. The skilled labor force, right, is small. Materials keep going up. So maybe a $12,000 repair on pipes today is going to cost you $18,000 in 3 more years. So I'm hearing a lot of that about roofs. That, you know, that, oh, I got a bid last year for $12,000, and now they're telling me it's $16,000. Well, it's because you waited, right? So you got to plan accordingly for inflation.

Yeah, no, and we've seen a lot of that where the cost of wood during COVID for example, just went through the roof.

That's my fault. I ordered a new deck.

Oh, bummer. Yeah, well, we built some new roofs and some new decks and some new windows. Whenever I do a project, prices go up. So yeah, that inspection report, uh, I did that on the first one, dude.

3, 4, 5.

First 5 properties I bought, I did an inspection report. Cody did an inspection report on the first 3 that he had in Moses. Between the 2 of us, we had 8 inspection reports. Cody's also gone through the inspection school. I don't even know what that's called, but he's gone through all the— Licensing. Yeah, all the licensing courses to be an inspector. We've done enough through roofs, windows, doors, electric, plumbing, multiple contractors, multiple times, multiple projects, I know what things will cost in my market. And every time I get it bid, my estimate is closer than the person who bids it. So we've gotten to that point in our market where Cody and I stopped doing inspection reports. If it's built in 1950s and it's Moses Lake, I— it's like x-ray vision. I can look at the wall and I'm like, I know what's in that wall, I know what that pipe is, I know everything that's wrong. We buy on numbers that tell us all this can fail and it's okay because I know exactly what I'm buying and I have a plan for it all to fail.

Yeah, don't assume the best.

Yeah, and so I look at it and I just go, okay, the pipes are gonna fail in 1 year and the electric is already hosed and we're gonna get called by the city at some point and say you need to upgrade this. Okay, I'm ready for this. Now, does that always happen? No, it almost never happens, but I am ready for it. So when there is a problem, it's already mathed in. That's the other way to do it. The correct way to do it, especially when you're starting, just get that inspection report. It's not that expensive. If you're buying a property, say it's a million-dollar property, it's gonna be what?

Well, it depends on the property. So if it's a single-family residence, you're gonna be like $450 in our area, this Western Washington. If it's a duplex, it might be $550 to a fourplex is a grand. Depends on square footage and size. It's the best money you're gonna spend besides the sewer scope. Like, I encourage all my clients, I put my eyes on a lot of things. I'm not a home inspector, I'm not a roofer, I'm not a plumber. But I've been to hundreds of inspections. I can tell you basically if I think that roof is in check or I see rot in the siding or a Federal Pacific panel that needs to be replaced because it's defective, but I can't put my eyes on the sewer line for clients. And so that's like a $300 investment in the process that will save you, could save you tens of thousands in surprises.

I think if I was to do mine just for my home, I think I got quoted like $35,000 to replace my line. It's really expensive, and the sewer scope was $250 when I did it years ago. Hundreds of dollars to save thousands. If you're buying a property that's, say, a million-dollar property, and your inspection report, $1,000, $2,000—

It's just the cost to do an inspection.

Yeah, somewhere like $1,000 to $2,000 on a bigger building. It's such a small fraction of your purchase price. If you have a deal where that actually makes any difference in your numbers, it was not a good deal to look at in the first place. Just numbers don't support it.

And it is real estate, so it's gonna happen. Guarantee it. That's the one guarantee I can give you. Things will happen with your real estate.

Yeah. So that's why due diligence is so important. You want to do all this math during due diligence because you're actually running your inspections. When you're doing your initial math, you're gonna have to use some common sense. When you're first starting, you can ask a contractor if they have any ideas for your market. I mean, an online calculator is better than not calculating for them at all. But get your initial numbers immediately once you go under contract. That is the first thing that I verify. Are the expenses what I expect? Well, there's two things. Are expenses in line? And did they lie about the income? Those are the two things.

And the other question I get from investors, okay, so let's say I fund it with 10, do I ever let that grow? Should I let it grow? Or should I just always take the excess cash flow every month because it's already— my reserves are already fully funded?

I love that question.

My brother and I, we did have a goal to get to $35,000, and once we hit that, everything was coming to us in additional cash. Now we may increase that next year, right? Because as we want to do bigger projects, maybe add carports or something like that, it's going to take more money, maybe $50,000. Uh, we were Airbnb with Rebecca, and we said when we bought that property we were going to keep $50,000 in reserves just to be safe because COVID was hitting. And then after we got things stabilized, we dropped that down to $30,000, and I think now we're what, $25,000 in reserves because we know the property now, we know what's going to go, what's going on with it, and we don't need to have $30,000. Mm-hmm. If that's an example.

No, that's absolutely perfect. And there's multiple ways to do it. When you have more properties, you can have a side account that just has reserves for a whole bunch of stuff. You can set it up however you want. The main thing is if you have a critical issue, the easiest way to solve it is with money on hand. If you don't have that, you're gonna have to figure out how to solve it out of cash flow. I've had things where I've had to call owners of companies and say, hey, Just bought this like a month ago. Cash flow is supposed to fill up the reserve, hasn't done that yet. Can we spread these payments out over a few months? They usually require a chunk down for that, but you can negotiate your way through a lot of problems. You don't want to have to do that. So if you can set aside the reserve, do that. If you can't, create a plan. If something happens in between, have a good plan on how you're going to negotiate your way through it because If you don't have the money, turn it into a cash flow problem. But that is how you're going to look at the maintenance issues. It's the least intuitive, in my opinion, of all your analytics going into a new property. So just know that that is one of the main things you have to do. You have to verify income and correctly estimate expenses. If you do that, your numbers work. So huge piece of it. I hope this was helpful. If you like this, share it with a friend, like, subscribe, and we will see you guys next week for Multifamily 101.