We’ve found that buildings further north tend to have higher OR’s and buildings further south have lower OR’s. The more recently the building has been rehabbed or the newer it is the lower the OR will be too. Of course, that will also depend on how extensive the rehab was. If all someone did was throw on some new paint, replace an appliance and put in new carpet, your expenses will be higher. Now, if they put in all new appliances, new windows, new roof, new mechanicals (AC, boiler/chiller, elevator), new fixtures and/or new kitchens/baths, then your expenses will also be lower.

     How do you find out what the average OR is for the area in which you want to purchase? Easy. There’s several ways to find out this information. One way is to speak with several commercial brokers in that market that specialize in Apartments. We prefer brokers with a CCIM designation. You can find them at www.CCIM.com The second way is to speak with several Property Managers in that market. You can review some of my past articles on my web site for ways to find good quality contacts. Another way is to go to the web site www.IREM.org and purchase the information from them. IREM conducts an annual survey of thousands of Apartment owners/managers nationwide and compiles a plethora of information that is extremely useful. The downside is that the report is several hundred dollars to purchase. So unless you have a pretty decent positive cash flow already, you may want to go the less expensive route and contact the brokers and PM’s in the area. Besides, you can’t ask a report a question now can you?

     Once you know what the average Operating Ratio is in your market you can use that information to see how a complex you’re looking to purchase compares. If the average should be between 40%-50% and you find a complex with an OR of 38%, it usually means that the seller is either hiding information or they are just very efficient. In some cases the owner maybe doing their own management and, therefore, they don’t include a management percentage which you will need to do. In other cases they literally are lying to you and trying to hide expenses which you’ll have to uncover during the due diligence phase if you get that far. We’ve seen several complexes that are over 40 years old with no recent rehab work completed where the OR was as low as 26.9% in one case and around 22% in another case. Do you think this could have been a problem? You betcha.

     On the other hand, if you find a complex with an OR above 50% that can mean some real money in your pocket. As an example, if you find a property with an OR of 51% and the market average is 44% in that area, and, if you can find out why the expenses are out of whack and get them under control, every dollar you save will literally go straight to your bottom line. However, I wouldn’t recommend buying the complex unless you can figure out why the expenses are out of whack beforehand. If you buy it first in the hopes that you’ll be able to figure it out later, you maybe in for a rude awakening. Getting the expenses under control can also result in an increase in your property’s value thru something called ‘forced appreciation’. I’ll talk about that in next month’s article.

     Until then, have a great month and may God Bless you and your family.