Doing a First Year Projection

Many investors rely on me to find the right investment for them. To take it one step further, investors want me then to predict what they will earn in year one. Wow, can we predict the future? Of course not but we can narrow in on a realistic expectation. I underline the word realistic because its too easy for us to set high objectives only to be upset.

Pass the Seasoning, Please

I like to have at least three years of complete income and expenses from accounting reports and the tax returns. Starting with the income side, call and do a quick comparable rent survey yourself. Get a complete rent roll and study it. Are the rents competitive? If you were a prospect, why would you want to move into the property you are considering? Look at the trends of income over the last three years and expect the first year to follow the trend unless the property cannot compete due to condition, etc. Look the property over thoroughly to make sure every apartment or suite is in rentable condition or its income can go down compared to previous years. Allow the loss of income until the site can become attractive to find tenants. In good economies rents may go up 2-4% but usually not much more.

Once the maximum income is predicted, subtract the areas vacancy rate along with a 3-4% delinquency allowance. Continually compare your ultimate answer with the true collections of previous years and adjust if needed.

Expense Projection

Real Estate Taxes. Adjust based on your purchase price. Call the local county treasurer and explain what your purchase price will be and ask what will the taxes be adjusted to. In many locations the taxes will change for sales transactions over $100,000 or more.
Insurance. Get a couple of bids and add to projections.
Water/Gas/Electric. Call local utility providers and adjust upward to allow for inflation and cost increases (usually 3-6% per year)
Management. Get price from your projected manager or allow to pay yourself 4-6% of the gross collections expected
Reserves for Major Improvements including appliances, roofs, HVAC, carpet, exterior repairs and painting, major electric and plumbing. Allow $350 per apartment of 6% of income
Routine Maintenance. Look at previous three years and adjust accordingly or use 7% or gross per year

Remember every deal is different. Lease may be NNN or gross leases so often times expenses are reimbursed to Landlords. Commonly apartment expenses are averaging 42-47% of income or $2600 – $3500 per unit per year. Full Service Office Buildings are operating at $5-7 per square foot. Retail and Industrial Buildings are operating for $3-5 per square foot. These figures are subject to change due to inflation, etc as I wrote this article in 2012. Again, every deal varies but these are some ranges. It is most important to use seasoned history to make accurate forecasts. Good luck and happy forecasting.