What are multifamily expense benchmarks and how are they used?

What are Multifamily Expense Benchmarks and How are They Used?

Multifamily expense benchmarks are standardized metrics used to evaluate operational costs such as utilities, maintenance, and taxes in multifamily properties, enabling comparisons across different properties and markets. Property managers and investors utilize these benchmarks for budgeting, forecasting, and assessing the financial efficiency of properties, by comparing actual costs against established norms to identify inefficiencies and opportunities for cost reduction. These benchmarks are crucial for making informed operational adjustments, investment analyses, and ensuring competitive market positioning of properties.

How are Operating Expense Benchmarks Used?

1. Budgeting & Financial Forecasting: Property owners and managers can better anticipate and allocate resources for future expenses if they have an understanding of standard costs.
2. Operational Efficiency: Comparing a property's expenses to industry benchmarks can highlight areas of inefficiency. If a particular expense is notably higher than the benchmark, it may indicate a need for operational changes or renegotiation with vendors.
3. Investment Analysis: Investors looking to acquire a property will examine current expenses in comparison to benchmarks to determine potential profitability and return on investment.
4. Value Enhancement: By identifying and reducing excessive expenses, owners can increase a property's net operating income (NOI), which can in turn raise the property's overall value.

Which Line Items are Typically Included in Multifamily Expense Benchmarks?

1. Property Management Fees: Typically a percentage of collected rents.
2. Utilities: Costs for water, sewer, electricity, gas, and sometimes trash removal.
3. Maintenance and Repairs: Regular upkeep, landscaping, and costs associated with addressing wear and tear.
4. Marketing and Advertising: Costs to advertise vacant units or promote the property.
5. Property Taxes: Often based on assessed property value and local tax rates.
6. Insurance: Costs to insure the property against various risks.
7. Reserve Funds: Money set aside for significant future expenses like roof replacement or major renovations.
8. Administrative and Other Fees: This can include office supplies, legal fees, or any other operational costs.

How to Leverage Multifamily Expense Benchmarks in Your Analyses

1. Data Collection: Gather detailed records of all expenses related to the multifamily property you're evaluating.
2. Comparison: Compare each expense category of the property with the respective industry benchmark. This will provide a sense of how the property stacks up against averages or typical ranges in the industry.
3. Identify Anomalies: If an expense is significantly higher than the benchmark, investigate the cause. It might be a one-time anomaly, or it could signify an inefficiency or issue that needs addressing.
4. Adjust Strategy: Use the insights gained from comparing against benchmarks to make operational changes, renegotiate contracts, or adjust budget allocations.
5. Regular Review: Just as with rent comps, the multifamily industry and its associated expenses can change over time. Regularly revisit and update your benchmarks and compare them with your property's expenses.

Multifamily expense benchmarks are tools that help stakeholders in the multifamily real estate market ensure efficient operations, maximize profitability, and make informed investment decisions. Proper use of these benchmarks contributes to successful property management and profitable investments.