Commercial Real Estate – Legitimate Operating Expenses

When running your numbers for your commercial real estate deals, what costs do you consider?  You must have a clear way to determine your net operating income which is dependent on your operating expenses line items.

A common issue for new commercial real estate investors is that they lack familiarity with the correct way to look at the numbers as they are considering a deal.  New investors ask me all of the time ... "Rick, what is considered to be a legitimate  operating expense regarding a commercial property?" Simply put, operating expenses are costs associated with the operations and maintenance of an income producing property. These costs are vital with keeping the place running.  There are, however, many who don’t realize that there are certain figures that don’t get incorporated into the operating expenses, such as debt service and loan origination fees.  In order to be accurate in running your numbers, be sure to tune in to legitimate expenses for accuracy with the Net Operating Income (Income after deducting for operating expenses but before deducting for income taxes and interest.)

Here are some legitimate expenses for consideration as you are figuring your numbers:

- Property Taxes (be aware of the potential for taxes to increase)
- Insurance (insurance can also increase, but does more so when there have been incidents claimed)
- Accounting Expenses
- Property Management
- Attorney Fees
- Permits
- Office Expenses
- Utilities
- Trash Removal
- Janitorial Service
- Telephone
- Internet
- Leasing Commissions
- Lawn Care
- Supplies
- Advertising
- Repair Costs
- Pest Control 
- Salary and Wages
- Etc.

It is important to note that Operating Expenses do not include the following.

-  Capital Gains Tax (the difference between what you paid for an investment and what you received when you sold that investment)

-  Loan origination fees ( a one time fee a lender can impose to cover the costs of initiating the loan that is payable at the close of the loan )

-  Debt Service (includes the payments of interest and principal required to pay down debt over a period of time)

-  Capital Expenditures (expanding, new roof, etc)

It is very important to get familiar with the expenses associated with the type of income producing real estate you are looking to invest in. For instance, mobile home parks will have expenses unique to them, versus storage units.  Our property evaluation software helps us to ensure that we have accounted for every possible expense when we evaluate a property that may become a new addition to our portfolio.  For those new to investing, identifying and utilizing evaluation software can help you make sure all the appropriate expenses are already listed and included in your estimates so you don’t miss any in your calculations.  Be sure to understand your numbers and how they assist you in becoming clear about a commercial real estate deal’s potential for cash flow.


Mr. Melero is a principal in the Tampa, FL based HIS Real Estate Network, LLC, a residential real estate and commercial acquisitions and marketing firm where he spearheads income producing real estate projects and oversees the company’s performance. He is a professional real estate investor, speaker, published author and one of the elite mentors of the Trump Institute. Through some of the nation’s leading seminar companies he has sold over 250 residential wholesale properties. He is a dynamic and well-received presenter and has shared the platform with well-known real-estate trainers throughout the United States. Rick is also one of the Managing Members of the Real Deal Community, sponsored by HIS Real Estate Network, one of the fastest growing investor communities with over 20,000 active investors and counting. They have been featured in Forbes, Yahoo Finance, Los Angeles Times and Market Watch. 

Article Tags: Commercial Real Estate, Commercial Real, Real Estate, Operating Expenses, Income Producing

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