It is not uncommon for owners to under-report income and over-report expenses. This is especially true when it comes to filing taxes. The net operating income amount is the key amount in multifamily investments. This amount is used to decide value, profitability, and widespread power of the multifamily unit.
Net operating income is the gross income less the operating expenses. Depreciation and mortgage interest are not determined in the calculation. A distinct calculation will be used with observation to proposed mortgage payments to decide a maximum loan size. This called a "Debt service Coverage Ratio" calculation.
It is typical of the commerce to think the following expenses as "operating expenses."
Real Estate Taxes
Property Insurance
Utilities
Repairs and Maintenance
Janitorial
Interior/Exterior Decorating (Usually applies to Apartments)
Management
Too many times I am looking at deals where the borrower has fallen in love with a single property. The realtor has in case,granted them with a pro forma displaying excellent cash flow with no down side. The buyer is all set with their down cost money and is just waiting for me to flip the magic funding button so they can reap the endless benefits of their venture property.
The first thing I clarify to these borrowers is the fact that the numbers they were in case,granted were not real. They often show what income the park could create at full occupancy with increased rents. This may be helpful to some investors looking for upside potential, but a lender sees it as completely useless. A lender's best clue to how a asset will accomplish in the future is to look at how it has performed in the past. Lenders have special filtering goggles that only allow them to see a amount representing risk. They don't look at hopes, dreams, or speculation. For the most part a lender wants to see that a asset has cash flow to retain normal expenses including loan payments with a slight cash left over. Cash flow is key to any accepted finance program.
So we throw out the pro forma data and procure up to 3 years of actual income/expense statements. After we have what we would think to be real numbers, we start to sort data further. Park owners will, more so than not, consist of expenses such as car insurance, condition insurance, gas, bank charges, etc. These are ordinarily determined to be outside the definition of operating expenses. Lenders are looking for "normal" operating expenses. Expenses that are required for the park to run, normally, are looked at. Some is left to interpretation, but these numbers become easier to filter out as you become experienced in the buying process.
The expense ratio for a mobile home park will ordinarily be about 20%-35% of the gross income. Park-owned mobiles, master-metered utilities, miscellaneous amenities, etc. Are factors that will send the ratio to the higher end of the spectrum. Individually metered utilities, tenant-owned mobiles, etc. Tend to mitigate expenses.
The area of the country will also be a big clue as to what can be improbable in expenses. In Fl taxes can be highly high. This is also true in Ca. Many times a tax expense in Ca or Fl will change dramatically from before it was purchased. The surmise for this is that Ca and Fl adjusts asset taxes based on the date of sale. Once title is transferred, the new tax adjustment is set in place.
The job of the realtor: to show the asset in its best light. The job of the buyer: to sort through the nonsense to find the real value of the property.
The thing to remember is, benefit. Citizen will be motivated by what benefits them the most. Start to think like a asset owner, instead of a buyer, and you may find yourself one step ahead of the game. Once you have analyzed many deals, it will become easier to spot numbers that are probably an incorrect reflection of operation. I advise getting out to shop, shop, shop. See what's out there. It will come together as time goes on, and taste has begun to weigh in your favor.
A True Net Operating wage