Estimating OPEX Costs and How They Impact Your Valuation
Understanding your operational expenses (OPEX) is critical for any real estate investor, but especially for those involved in Build-To-Rent (BTR), Purpose-Built Student Accommodation (PBSA), and co-living properties. These ongoing costs, which cover everything from utilities and maintenance to management fees, play a significant role in shaping the viability and value of an investment.
Table 1 provides a breakdown of the typical OPEX costs for BTR, PBSA, and co-living properties as a percentage of total operational costs:
| OPEX Categories | Average % of Total OPEX |
|---|---|
| Utilities | 5% |
| Maintenance | 10% |
| Management | 5% |
| Marketing | 5% |
| Property Taxes | 15% |
| Insurance | 5% |
| Legal and Accounting | 5% |
| Repairs and Renovation | 30% |
| Cleaning and Security | 20% |
| Total | 100% |
(The percentages mentioned above are illustrative averages based on industry standards. They can vary from one property to another.)
Capitalization rate, or cap rate, is a critical concept in real estate investment. It is used to estimate the investor’s potential return on their real estate investment. It’s calculated by dividing a property’s Net Operating Income (NOI, the difference between rental income and OPEX) by the property’s market value.
Cap Rate = Net Operating Income / Market Value of Property
Let’s consider a hypothetical co-living development. Suppose this development has a rental income of $1,000,000 per year, and using the industry averages provided above, we calculate an annual OPEX of $300,000. This leads to an NOI of $700,000. If the market value of the property is $7,000,000, the cap rate would be:
Cap Rate = $700,000 / $7,000,000 = 0.10 or 10%
This cap rate can be used to assess the investment’s performance compared to other properties or investment opportunities. The higher the cap rate, the higher the risk associated with the investment, but also the higher the potential return.
However, changes in estimated OPEX can greatly affect the cap rate and the valuation of the property. If OPEX were underestimated and, in reality, it turned out to be $400,000 per year, the NOI would be reduced to $600,000, and the cap rate would fall to 8.57%.
Underestimating OPEX not only impacts the return on investment but also potentially skews the property’s valuation, making it seem more valuable than it actually is.
In conclusion
Understanding and accurately estimating OPEX is crucial in real estate investment. This becomes even more significant in specialized sectors like BTR, PBSA, and co-living properties where operating costs can vary more widely. Failing to correctly anticipate these costs can result in a distorted view of an investment’s profitability and may lead to unexpected surprises down the line. By taking the time to accurately predict these expenses, investors can make more informed decisions and better protect their investments.
Here’s a table showing the total OPEX costs vs. revenue only for build to rent, PBSA, and Coliving developments, using industry averages:
| Development Type | Total OPEX Costs | NOI % |
| Build to Rent | 25-30% | 70% |
| PBSA | 30-35% | 65% |
| Coliving | 30-35% | 65% |
Feel free to use this table when creating desk top appraisals for potential projects!
As you can see, the total OPEX costs for build to rent developments are the lowest, at 25-35% of revenue. This is followed by PBSA developments and Coliving developments have the highest total OPEX costs, at around 30% of revenue.
The reason for these differences is due to the different operating expenses associated with each type of development. Build to rent developments typically have lower operating expenses than PBSA or coliving developments, because they typically require less intensive management and have fewer amenities. PBSA and Coliving developments have higher operating expenses than build to rent developments, because they are typically located in more urban areas have a different tenant profile, require more intensive management facilities and have more amenities.
It is important to note that these are just industry averages, and the actual OPEX costs and revenue for a particular development will vary depending on a number of factors, such as the location, size, and amenities of the development.
Before You Go!
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