Operating Expenses in typical Investment Properties
Operating expenses refer to the ongoing costs associated with the management, maintenance, and operation of an investment property. These expenses are necessary for the property’s day-to-day functioning and are subtracted from the rental income to determine the Net Operating Income (NOI).
Let’s break down the key operating expenses typically incurred in the management of commercial multifamily properties.
Repair and Maintenance
Repair and maintenance expenses cover the costs of fixing or maintaining common property issues. This includes repairs to appliances, plumbing (e.g., toilets), lighting, and other small-scale maintenance tasks.
Note that major capital expenditures (CapEx) like replacing countertops, roofing, or HVAC systems fall outside of this category.
Older buildings tend to have higher maintenance costs compared to newer properties, as they may require more frequent repairs.
Contract Services
Contract services include essential, recurring services that support property operations. These can involve external providers for services such as snow removal, pest control, internet installation, and janitorial work. These are typically handled through formal contracts with third-party vendors.
Landscaping and Grounds Maintenance
Landscaping and grounds maintenance expenses are typically ongoing costs related to maintaining the exterior of the property. This includes mowing, trimming, seasonal clean-up, and potentially snow removal. Since these tasks are usually contracted out, landscaping could also fall under contract services.
Payroll
Payroll expenses cover the salaries of the on-site staff required to manage and maintain the property. Depending on the size and type of property, this could include property managers, maintenance workers, leasing agents, and front desk personnel.
Note that payroll costs exclude the property management fee, which is addressed separately.
General and Administrative Costs
General and administrative (G&A) expenses cover the operational costs of running the property’s office and administrative functions. This includes office supplies, furniture, computers, software, and any other equipment needed for day-to-day operations.
Utilities
Utility expenses are a major component of operating costs for multifamily properties. These costs cover essential services such as electricity, water, gas, and trash removal. Common utility expenses include:
- Electricity: Powering common areas (e.g., hallways, lighting) and vacant units.
- Water and Sewer: Costs for water usage and wastewater management.
- Gas: Natural gas or propane for heating, cooking, and hot water.
- Trash: Dumpster services, which can either be included in contract services or categorized as a utility expense.
Property Management Fee
The property management fee is paid to the property management company for overseeing the day-to-day operations of the property, including leasing, rent collection, and property maintenance. This fee is typically calculated as a percentage of total collected income and can vary depending on paroperty size, location, and market conditions. It’s important to note that this fee does not cover payroll expenses for on-site staff.
Insurance
Insurance premiums are an essential expense for investment properties, providing coverage against potential risks and liabilities. Insurance protects property owners and management from financial losses due to events like natural disasters, accidents, or liability claims.
Real Estate Taxes
Real estate taxes (property taxes) are levied by local governments on land and buildings. These taxes are typically the largest operating expense for multifamily properties and contribute to funding essential public services such as education, infrastructure, and emergency services. Property tax rates and assessments vary by location, and how these taxes are calculated depends on the county or municipality where the property is situated.