CAP RATE - Apartment Building Sales.ca

The Canada Mortgage and Housing Corporation (CMHC) often provides average expense numbers to aid in the calculation of a capitalization rate (cap rate) for real estate transactions. Cap rates are an essential metric for investors to assess the potential return on investment for a property. While CMHC provides these average expense numbers as a reference, it’s essential to remember that actual expenses can vary based on factors such as the property’s location, condition, size, and management efficiency. Investors should use CMHC’s averages as a starting point and adjust them based on their specific circumstances and due diligence.
CMHC typically tracks historical income and expense data for various types of properties, which can be helpful in determining average expense numbers. These expenses may include management fees, staff salaries, maintenance costs, utilities, property taxes, insurance, and other operational expenses..
To calculate the cap rate using CMHC’s average expense numbers, you would typically divide the property’s net operating income (NOI) by its purchase price or appraised value.
By using CMHC’s average expense numbers in this calculation, investors can estimate a cap rate that reflects market norms and helps them make informed decisions about potential investments.
Management fees are a significant component of operating expenses in real estate, and as I mentioned, they can vary based on factors such as the property type, location, management company, and market conditions. It’s crucial to consider these variations when assessing the overall expenses and potential returns on investment. While CMHC may provide average expense numbers, including management fees, it’s essential for investors and financing institutions to recognize that these figures serve as guidelines rather than rigid standards. Management fees typically range between 3.5% and 5.0% of the effective rent, but actual rates may differ based on negotiations, market factors, and the level of services provided by the management company. Additionally, financing institutions, including CMHC, may adjust expense figures based on their own criteria and observations during the underwriting process. This adjustment process is normal and accounts for factors that may not be captured in the initial assessment.
Superintendent fees are another crucial aspect of operating expenses in real estate, especially for multi-unit residential properties. These fees cover the cost of employing a superintendent or building manager responsible for overseeing day-to-day operations, maintenance, and tenant-related issues. On average, superintendent fees typically range between $350 to $450 per door (or per unit), but this can vary based on market conditions and specific property characteristics. For example, properties in high-demand urban areas or those with extensive amenities may command higher fees, while properties in more rural or less affluent areas may have lower fees
Maintenance expenses encompass a wide range of costs associated with preserving and repairing the property’s physical structure, systems, and amenities. This includes routine maintenance tasks like landscaping, cleaning, and HVAC servicing, as well as larger-scale repairs and replacements such as roof repairs, plumbing upgrades, and building renovations. Maintenance expenses are a critical component of operating expenses and can vary significantly based on several factors such as property age, condition, size, and location. Understanding these expenses is essential for accurately assessing the financial health of a property and its potential return on investment.
Elevator maintenance contracts are crucial and mandatory for ensuring the safe and efficient operation of elevators within a property. These contracts typically cover regular inspections, maintenance, repairs, and emergency services for the elevator system. When reporting elevator maintenance expenses, the straightforward approach is to include the contract amount and the expiration date of the contract. This provides transparency regarding the ongoing costs associated with elevator maintenance and allows stakeholders to plan for future expenses.
Disposal costs are an important consideration for property owners, especially in the context of managing waste removal and ensuring compliance with local regulations. These costs may cover various aspects such as trash removal, recycling services, and hazardous waste disposal, depending on the type and scale of the property. Disposal costs may be included in property taxes, particularly in districts where waste management services are provided by the local government or municipality. In other cases, property owners may contract with third-party waste management companies to handle disposal services, which will incur additional expenses. To accurately report disposal costs, it’s essential to distinguish between any expenses included in property taxes and those incurred through third-party contracts. Regularly reviewing disposal costs and obtaining new quotes from different waste management providers can help property owners identify cost-saving opportunities and ensure that they are receiving competitive rates for disposal services. This proactive approach allows property owners to stay informed about market trends and adjust their waste management strategies accordingly.
Insurance contracts are typically non-transferable between property owners, meaning that existing insurance arrangements may need to be reassessed and renegotiated during ownership changes. It’s important for property owners to be proactive in evaluating insurance contracts to ensure continuous coverage and compliance with lender requirements, especially if a change in ownership is imminent. Obtaining quotes for new insurance contracts well in advance of any property transaction allows property owners to compare coverage options and pricing from different insurers and make informed decisions about insurance arrangements. This proactive approach may save you money as insurance expenses tend to increase on a yearly basis and new quotes can help to lower these rates.
Double-checking contracts and budgeting for laundry expenses, including potential repair or replacement costs, is essential for effective property management and financial planning. Remember laundry has an entry in the income section of the Proforma and may make the key indicators look better.
While advertising expenses may not be a required field in all financial reports or formulas, property owners should consider including them when evaluating the overall operating costs and financial performance of the property. Transparent reporting of advertising expenses demonstrates proactive marketing efforts and supports informed decision-making for property management and leasing strategies. Whether advertising expenses are required or not depends on the specific needs and goals of the property owner, as well as market conditions and tenant demand. large buildings and institutional buyers/owners will have an advertising budget.
Property taxes are indeed a significant operating expense for property owners, and their accurate reporting is essential for understanding the financial standing of a property and making informed investment decisions. Real estate representatives, as licensed professionals in the industry, often play a crucial role in facilitating the exchange of accurate financial information, including property tax reporting. Adhering to the requirement of updating tax information when changes occur ensures compliance with regulatory standards and industry best practices. This helps maintain the integrity of the proforma and ensures that it accurately reflects the financial realities of the property.
UTILITIES- Utility expenses should be listed independently and current for the past twelve months.
OTHER CONTRACTS- Other contracts include any non-transferable, transferable, needed or not needed.
Disclaimer- all these numbers and categories may have a variance for each different set of eyes viewing them. Including utilities, as we all know these expenses are increasing year over year and if your purchase is closing at the end of the year what will these expenses be in twelve months from the date of closing. Equally or even of greater importance is the inclusion of all or a partial list of the above categories. The best defense is to understand a comprehensive list of categories and acknowledge the absence of any missing category.
Example- I would rather receive an NOI with the knowledge of the management and superintendent fees not being included then an incorrect representation or fair representation of the proper management style verses possible more stringent management as seen by the buyer or lending institutions. This way you can use CMHC’s number and have a better picture of the overall view.