When evaluating if a deal is worth proceeding or not, it is important to calculate its Expense Ratio. Ideally, if the current property owner or property manager maintains good records, it is very easy to obtain last 12 months (T-12) records so we have some solids numbers to work with. There are 2 types of expenses you need to pay attention to:

Fixed Expenses

These are typical expenses that you can expect to see every month, and sometimes referred as the “operating expenses.” These costs are predictable, as you should see them repeating themselves in a similar fashion every month. At the same time, this type of expenses are structural so whether you make money or not they will still show up every month. Fixed expenses include:

• Property Manager Fee
• Insurance Cost
• Property Taxes
• Landscaping Fee

Variable Expenses

These are expenses that do not tie to the operations of the property. You wish to not see them and honestly in most cases you should not see them show up constantly. If you do, it is definitely an area you want to improve once you take ownership of the property. Variable expenses include:

• Maintenance and Repairs Costs
• Tenant Placement Fee
• Unit Make Ready Costs
• Advertising Fee

Expenses Estimation

In the event that the current owner does not do a good job documenting expenses, it may not necessarily mean you should just reject the deal. A treasure deal is for people who is willing to take the extra step and also willing to take that extra step with some manageable risk. DoorInvestor likes to evaluate a deal by estimating the expenses by using a statistical pre-defined expense ratio. The rules are defined as:

• If landlord pays for some utilities, use expense ratio 55%
• If tenant pays for all utilities, use expense ratio 45%

Here is an example: If the monthly Gross Income is $1,000 and the landlord pays for water and trash, we will estimate the monthly Expenses to be 55% of $1,000 which equals to $550, resulting a NOI of $450. Using the same figures, if the tenant pays for all utilities, we will estimate the monthly Expenses to be 45% of $1,000 which equals $450, resulting a NOI of $550 per month.

Using the 45% or 55% ratio to estimate expenses give us a conservative yet effective way to evaluating a deal.