One of the fastest ways a “good deal on paper” turns into a disappointing investment is through understated operating expenses.
Many failed multifamily deals I review do not collapse because income projections were wildly wrong. They unravel because expenses were too optimistic, outdated, or misaligned with the property and market reality.
Expense validation is not about being pessimistic. It is about being realistic.
Below are the most common expense adjustments investors miss when underwriting, and why they matter.
1. Property Taxes: Assume They Will Go Up
This is one of the most frequent underwriting mistakes.
Many proformas use in-place taxes, even when a sale will trigger reassessment. In many states, a sale resets the tax basis closer to the purchase price.
What to adjust:
- Recalculate taxes based on purchase price, not trailing tax bills
- Confirm local reassessment rules and timing (those vary by county)
- Stress test for partial-year increases if reassessment lags
- Allow buffer time for tax exemptions, as garnering approval for those may take longer than expected
Why it matters: A tax miss alone can wipe out early cash flow if reserves are thin.
2. Insurance: Yesterday’s Premiums Are No Longer Relevant
Insurance costs have structurally changed.
Rising replacement costs, tighter underwriting by carriers, climate exposure, and higher deductibles mean historical insurance is often meaningless.
What to adjust:
- Request current broker quotes, not historical premiums
- Increase assumptions for older properties and Class C assets
- Model higher deductibles and self-insured layers where applicable
Why it matters: Insurance is no longer a “plug number.” It is a volatile line item that can materially impact NOI and force capital calls.
3. Repairs & Maintenance: Class Matters More Than the Average
Understated R&M is one of the most dangerous expense assumptions, especially for Class C properties.
Deferred maintenance, aging systems, and tenant wear-and-tear drive higher ongoing costs.
What to adjust:
- Increase R&M for older assets and value-add strategies
- Normalize expenses to a per-unit basis, not percentages alone
- Align R&M with property age, unit count, and renovation scope
Why it matters: Low R&M assumptions artificially inflate cash flow and hide operational risk.
4. Unit Turns: Renovation Is Not Just Capex
Turn costs are often underestimated or partially buried in capital budgets, even though they recur throughout the hold period.
What to adjust:
- Separate ongoing turn costs from one-time renovation capex
- Increase turn assumptions in high-churn or workforce housing
- Account for both labor and materials inflation
Why it matters: Ignoring realistic turn costs distorts stabilized NOI and exit valuation.
5. Contract Services: Inflation Hits Here First
Landscaping, trash, pest control, security, cleaning, and HVAC contracts tend to reprice faster than many investors expect.
What to adjust:
- Increase contract services in inflationary environments
- Validate assumptions against local vendor pricing, not legacy contracts which may be resetting upon expiry
- Adjust upward for properties requiring security or enhanced services
Why it matters: Contract services creep quietly and permanently into the expense base.
6. Expense Ratios: Context Over Rules of Thumb
A flat “40% expense ratio” tells you very little without context.
Better questions to ask:
- What is the property class?
- What is the age and condition?
- What services are included or excluded?
- How do expenses compare on a per-unit basis?
Why it matters: Percentages hide risk. Line-item validation reveals it.
The Underwriting Mindset Shift
Strong underwriting is not about making a deal work. It is about understanding what has to go right for the deal to work.
When investors underestimate expenses, they are not just inflating returns. They are removing margin for error, and margin is what protects capital when reality diverges from the spreadsheet.
Final Thought
If you only take one thing from this article, let it be this:
Income projections get the attention. Expense assumptions determine survival.
The best investors and lenders I know spend more time validating expenses than polishing upside.
If this was helpful, I would love to hear from you: Which expense line item do you see underestimated most often in deals you review?
If you want a deeper, step-by-step framework for validating expenses (and the rest of the underwriting process), this is covered in detail in my book Mastering Multifamily Underwriting.
Vessi Kapoulian
Breaking down multifamily underwriting one step at a time to create educated and empowered investors