What are Operating Expenses (OpEx)?
Operating expenses (OpEx) are the regular expenses involved in owning and operating a multifamily. Operating expenses form a critical component of evaluating the financial viability and profitability of multifamily investment properties, especially in the context of real estate syndication. Furthermore, understanding these expenses helps the Fish Capital team make calculated decisions on what value-add initiatives we should undertake.
What are Operating Expenses in Real Estate?
Operating expenses refer to the ongoing costs incurred in a multifamily investment property’s day-to-day operation and maintenance. These expenses encompass various categories and cover a wide range of costs necessary for the property’s functionality, preservation, and profitability.
Common expenses that are categorized as operating expenses in multifamily properties include:
- Property Management Fees: Compensation paid to professional property management companies who are responsible for overseeing the property’s operations, maintenance, tenant relations, and rent collection.
- Maintenance and Repairs: Maintenance and repair expenses cover the costs associated with the upkeep, regular maintenance, and necessary repairs within the property. This includes fixing and maintaining HVAC systems, plumbing, electrical work, landscaping, and general upkeep to ensure the property remains attractive and habitable for tenants. It does not include new systems, as these would be considered capital expenditures.
- Utilities: The costs for providing essential services to the property, including electricity, gas, water, sewer, trash collection, and other utility services. Some of these expenses are passed on to tenants.
- Insurance: Insurance is essential to safeguard investments against risks such as fire, theft, liability claims, and natural disasters. Insurance costs can vary based on the property size, location, coverage limits, and other factors.
- Property Taxes: Property taxes are the annual taxes levied by local governments on real estate assets. Property taxes vary depending on the property’s assessed value, local tax rates, and any applicable exemptions or abatements.
- Marketing and Advertising: Marketing and advertising is often necessary to attract tenants. These costs include online listings, signage, brochures, and any promotional efforts to ensure a steady inflow of tenants.
- Administrative and Legal Expenses: These expenses cover a range of costs associated with property management, accounting, legal counsel, lease drafting, tenant screening, and compliance with regulations.
Operating Expenses & Taxes
Operating expenses incurred in the ordinary course of business are generally deductible for tax purposes in the year they occur. These expenses can be subtracted from the property’s income, thereby reducing taxable income and ultimately lowering the tax liability.
Operating expenses are typically classified as outflows in the operating activities section of the cash flow statement. They are subtracted from the property’s operating income to calculate the property’s net cash provided by operating activities.
High operating expenses in a potential investment acquisition can be an easy opportunity to improve the property’s cost efficiency and returns. At Fish Capital, we aim to limit operating expenses as much as reasonably possible while still maintaining an excellent product for tenants and the community.