Apartment Building Operating Expenses: The Categories, the Cost per Unit and What Is Not an Operating Expense

What are operating expenses for an apartment building?

Operating expenses are the costs of running an apartment building month to month: staff, repairs, utilities, property tax, insurance, management and office costs. The loan, capital projects and reserve deposits are not operating expenses.

On our home page these are called running costs. They are the lines between the rent collected and net operating income, which is what is left after running costs and before the loan. Operating expenses are the money-going-out half of apartment building bookkeeping.

What are the operating expense categories for an apartment building?

7 groups: on-site payroll, repairs and unit turns, utilities, property tax, insurance, management fee, and office and other costs. Each group is a set of accounts in the chart of accounts.

The groups sit in this order on every monthly P&L, so a line can be compared with the same line last month. Every group is a set of accounts in the chart of accounts for an apartment building. How each utility bill is recorded, and what tenants repay, is in RUBS and utility bill-backs.

Whether a big job is a repair or a capital project is decided with your CPA; this page says only where each is recorded.

How much are apartment building operating expenses per unit?

Divide each cost group by the number of units. Birch Way spends $27,000 a month on 50 units: $540 a unit a month, or $6,480 a unit a year.

Divide by all 50 units, rented or not. The empty units still have a share of the insurance, the tax and the payroll.

Birch Way, 50 units, invented data

For the whole building that is $324,000 a year. The per unit per year column is the one to keep: it is the view most comparisons use, and it comes straight off the P&L.

What is not an operating expense for an apartment building?

The loan payment, lender escrow and reserve deposits, capital projects such as a new roof, owner draws, and deposits returned to tenants. Each leaves the bank, and none is an operating expense.

• Loan interest and principal. Birch Way pays $33,500 a month: $24,300 of interest and $9,200 of principal. Both sit below net operating income, because the loan is how the owner financed the building, not a cost of running it.
• Lender escrow deposits. Birch Way's lender takes $6,500 a month for property tax and insurance. The tax and the insurance are already counted once, as the $4,600 and $1,900 lines. Counting the deposit too would count them twice.
• Replacement reserve deposits. The $1,050 a month the lender holds is the building's own money, set aside. It is still the building's, so it is not a cost.
• Capital projects such as a roof or a renovation. They add to the building and are recorded against it, not against the month.
• Owner draws. Money the owner takes out is not a cost of the building.
• Deposits returned to tenants. The deposit was held for the tenant and goes back to the tenant. It was never income, so returning it is not an expense.

The loan payment, the escrow and the reserve deposit leave the bank together as 1 lender draft of $41,050. How the loan payment is split is in recording a multifamily loan payment.

Tax items are not on the monthly books either; your CPA adds those for the tax return.

What is the operating expense ratio of an apartment building?

The operating expense ratio is operating expenses divided by the rent and other income collected. Birch Way: $27,000 divided by $68,150 is 39.6%.

In words: running costs divided by the income that came in. Birch Way collected $68,150 of rent in the sample month and had no other income, so $27,000 divided by $68,150 is 39.6%. The rest of each rent dollar is left before the loan.

The ratio moves when rent moves, not only when costs move. A month with more empty units shows a higher ratio on the same $27,000 of costs.

How do you compare an apartment building's operating expenses with a benchmark?

First check what the benchmark counts. Then put your own costs in the same groups, per unit per year. Compare group by group, never total against total.

1. 1Read what the benchmark counts. Some include the management fee, some leave out payroll, some add reserve deposits or the loan. Write the list down.
2. 2Put your own costs into the same groups, per unit per year. Birch Way's 7 groups above add up to $6,480 a unit a year.
3. 3Compare group by group. A total against a total hides a high utility bill behind a low tax bill.

This page quotes no benchmark figure. A figure is fair to compare with only when its source is named and says what it counts.

Which apartment operating expenses need their own records?

3 groups: unit turns, tracked per unit; on-site payroll, split across buildings; and property tax and insurance, spread over the months they cover.

Unit turns. Repairs and unit turns is 1 group with 2 accounts, 5100 Repairs and 5110 Unit turn costs. Each make-ready is tagged to its unit, so the cost of turning one unit can be read on its own. What each make-ready really cost is tracked in unit turnover costs.

On-site payroll. A manager or a maintenance tech who covers 2 buildings is 1 paycheck and 2 P&Ls. Splitting wages across buildings is in on-site staff payroll for apartment buildings.

Property tax and insurance. Both arrive as 1 or 2 big bills a year. Birch Way's P&L shows $4,600 and $1,900 every month, the yearly bills spread over 12 months. Spreading the 2 big yearly bills is in accruing property tax and insurance monthly.

How do operating expenses lead to an apartment building's net operating income?

Income collected minus operating expenses is net operating income. Birch Way: $68,150 minus $27,000 is $41,150. The loan payment comes after that line.

Birch Way, 50 units, invented data

Net operating income is what the building earns before the loan. Birch Way's $33,500 loan payment comes out of the $41,150, leaving $7,650. What counts toward that number is in net operating income for an apartment building.