The average operating expenses for an apartment building can vary greatly depending on the size and location of the property. Everyday operating expenses include utilities, insurance, and repairs and maintenance.
While these expenses can add up quickly, there are special tax considerations for owners who earn rental income on their apartment properties.
More significant apartment buildings have higher expenses than smaller ones with fewer units since they require more staff and upkeep.
How Are Operating Expenses Calculated?
Operating expenses for an apartment building are generally calculated as a percentage of the building’s gross income. The most common way to calculate operating expenses is using the operating expense ratio (OER). To calculate the OER, divide the total operating expenses by the total gross income.
For example, if an apartment building has total operating expenses of $100,000 and a gross income of $200,000, the OER would be 0.5 (or 50 percent). Keep in mind that different types of buildings will have other OERs.
Luxury apartments, for instance, will typically have higher OERs than more modestly priced buildings. Additionally, facilities in high-cost areas also tend to have higher OERs than those in lower-cost markets.
What Are the Different Types of Operating Expenses?
Operating expenses for an apartment building include real estate taxes and maintenance. In addition, market conditions, such as supply and demand, and location can ultimately impact the operating expenses for an apartment building, especially if the area is experiencing a housing shortage.
Here are a few of the most common expenses of operating an apartment property.
Staffing and Personnel Expenses
One of the most significant line items for apartment operating expenses is typically staffing and personnel expenses. An apartment property owner needs enough staff to care for tenants and maintain the property.
These expenses include wages for on-site staff, benefits, and training costs. The exact amount spent on staffing and personnel will depend on the size and type of the apartment property.
Repairs and Maintenance Costs
The amount of maintenance varies by the apartment building and considers factors like the property’s age, location, and amenities.
From lawn maintenance and gutter cleaning to snow removal and fixing broken appliances, maintenance expenses include cleaning between tenants. These expenses tend to be higher if a building is older.
High turnover rates also drive maintenance costs higher. However, by implementing preventative maintenance strategies, a property owner potentially keeps costs down and saves money.
For example, investing in drain snakes and augers can cut the maintenance bill. Property landlords may also take advantage of tax write-offs for qualified expenses.
Cost of Insurance
Property insurance is the most common type of insurance expense for an apartment building. This insurance covers the cost of repairing or replacing the physical structure of the building in the event of damage from a covered event, such as a fire, severe weather, and other hazards.
Property insurance typically also includes liability coverage, which pays for damages to third parties on the property, such as slips and falls.
There is also rent loss insurance that covers lost rental income if a property is deemed uninhabitable due to a covered event. An apartment building owner with staff and personnel may have to pay workers’ compensation insurance.
This insurance covers the medical expenses and lost wages of injured employees working on the property. In some states, workers’ compensation insurance is mandatory for all businesses, regardless of size.
Federal, State, and Local Taxes
With income taxes, property taxes, and city taxes, there are a lot of taxes involved with owning an apartment property.
Federal, state, and local governments collect taxes on rental properties, and the specific taxes owed will depend on the apartment’s location. Property taxes can also vary significantly from one jurisdiction to another.
At the federal level, apartment property owners pay income tax on their rental income. An apartment landlord may also be required to pay self-employment tax if they own more than two properties or actively manage them.
State and local governments also collect taxes on rental property. In most states, this is done through a real estate transfer or gross receipts tax. Local governments may also levy their taxes on rental property.
In addition to these general taxes, apartment property owners may also be responsible for special assessments levied by their municipality. These assessments can fund infrastructure improvements or other community projects that benefit apartment renters.
Marketing Costs
Marketing helps generate interest in and demand for the apartments. This tends to take the form of advertising, leasing commissions, and marketing materials:
- Advertising: This can include online listings, print ads, pay-per-click ads, and signage.
- Leasing commissions: These are paid to leasing agents who bring in new tenants.
- Marketing materials: These include brochures, flyers, and website design costs.
Cost of Utilities
Apartment utility costs are ordinary monthly expenses that can be high or low based on various considerations. Utility bills traditionally include electricity, gas, water, garbage collection, and recycling.
Apartments that use energy-efficient appliances and improved insulation can help keep heat in during the winter and hot air out in the summer.
Many apartment buildings use electricity for heat, and some even use natural gas to power appliances. These bills are based on how much the tenants use, and the landlord should have a waste management contract with a waste management company.
Trash pickup is also a landlord’s responsibility, although some leases require tenants to pay a monthly fee.
In addition to calculating utility costs, owners of apartment buildings can use historical information to predict future costs better. Utility costs are one of the most significant components of apartment complex expenses, and the past year’s results can indicate trends.
What Are the Average Operating Expenses for Apartments?
The average operating expenses for an apartment building can vary widely depending on the size and location of the property.
Expenses can include utilities, repairs and maintenance, insurance, and other fees for running an apartment building. The averages for operating costs can fluctuate from year to year.
According to a 2021 survey, for each unit in a mid- and high-rise apartment, repair and maintenance accounted for 8% of operating expenses, while taxes totaled 40%. The following highest cost was for salaries and personnel at 21 %.
Insurance took up 4% of operation costs, with utilities, marketing, and administrative expenses following suit with the same percentage. Lastly, contract services added up to 6%, and management fees were at 7% of operating expenses.
As for garden apartments, the highest operating expense for each unit was taxed at 34%, and next was salaries and personnel, accounting for 25%.
Expenses for repairs and maintenance totaled 8% of operating costs. In comparison, insurance took up 6%, contract services were at 7%, management fees were at 9% utilities were at 5%, and administrative costs were at 5%.
Can Apartment Property Owners Qualify For Tax Advantages?
A few potential tax exemptions for apartment property owners may include deductions for mortgage interest, property taxes, and depreciation. One exemption could involve the property used for low-income housing, as specified by the government.
Additionally, some states or localities offer tax breaks for energy-efficient buildings, and apartment buildings may qualify for this if they meet specific criteria. Lastly, those who own historic properties may also be eligible for an exemption from certain taxes.
