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  • Steven Fletcher

Nailing Overhead

Gathering operating expenses can be tricky when entering a new market and vary greatly depending on the location of the asset.


Everybody needs to pay their property taxes, insurance, maintenance costs, common area utilities, and budget for cap ex- but how do you gather firm estimates of these expenses to inform your underwriting?


Property Taxes- Your real estate brokers will have estimates on this, these can range from 1-2% of the property's purchase price. You won't pay the same rate as the current owner- need to make sure you have a tight projection of what these future taxes will be.


We also like to review all of the information on the the local tax assessor's website. If we have any questions, we'll call them to get further context.


These are often nice conversations with somebody who has likely lived in that city for a long time- great opportunity to ask about their experience.


Insurance- Collect references from your real estate brokers, lawyers, lenders, and/or do a quick Google search for commercial insurance brokers in X city. From here, find their website (make sure they're properly licensed and credentialed), reach out, and start to dig into their approach.


How responsive are they? Who would be your main point of contact? How do they structure policies for your asset type? What do their claims processes look like? What information do they need to pull quotes? What is the timeline to receive quotes? How many years have they worked in this market? Will they fight to save you money when possible?


Gather these inputs and then send over 2 sample listings for quotes. You're looking to nail down the costs to insure the asset and for variations in pricing across the brokers.


After pulling enough quotes, you'll have a firm idea of insurance costs and will hopefully have a great broker informing these inputs.


Maintenance Costs- Vary based on the property condition and market. These are often handled by your property management company (who can assist in finding these costs) but will be billed back to you. Important to account for both recurring and unforeseen maintenance costs.


Garbage Removal: In many cities, owners of buildings with more than 4 units need to hire a private garbage removal service. These can range from $75-$500 a month depending on the size of the complex. Broker referrals, a quick google search, or P&L's provided by sellers (which can list the name of the servicer) will provide options. Contact them and get pricing.


Snow Removal/Landscaping: Same process as the above


What preventative maintenance is needed?


Annual MEP inspections- who provides these and what do they cost? Ask your PM.


Who's replacing the air filters each quarter? Nail down every cost you can foresee. 


Common Area/Owner Paid Utilities: Listing P&L's and brokers can provide color- back in to what these cost on a monthly basis (make sure you blend these across 12 months, summer usage can be different than fall usage, be very cognizant of meter counts).

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