In this episode of Building Passive Income, CREI Collin breaks down multifamily operating expenses and how experienced operators budget accurately during underwriting.
Expense analysis is just as important as income analysis. Investors need to understand what it truly costs to operate a property, verify seller financials independently, and account for rising expenses that can impact cash flow and returns.
Learn the major expense categories in multifamily investing, common underwriting mistakes, and how conservative budgeting helps reduce execution risk.
What You’ll Learn
The difference between operating expenses and capital expenditures
Why property taxes often increase after acquisition
How insurance impacts underwriting
The difference between master-metered and separately metered utilities
How staffing and management costs affect NOI
Why repairs and maintenance are often underbudgeted
How turnover impacts operating expenses
What to expect for marketing and leasing costs
Why reserves for replacements matter
How to analyze seller operating expenses conservatively
Key Takeaways
Operating Expenses vs. Capital Expenditures
Understanding the distinction between operating expenses (OpEx) and capital expenditures (CapEx) is critical during underwriting.
Operating expenses are recurring costs required to operate the property.
Capital expenditures are larger, non-recurring investments such as:
Roof replacement
HVAC systems
Parking lot replacement
Major building systems
Misclassifying expenses can distort NOI and property valuation.
Property Taxes
Property taxes are often one of the largest operating expenses in multifamily investing.
A common underwriting mistake is relying on the seller’s current tax bill instead of projecting taxes based on the future purchase price.
Property taxes frequently increase after acquisition due to reassessment.
Investors should also understand:
Appeal processes
Assessment timing
Local tax regulations
Insurance Costs
Insurance costs have increased significantly in many markets.
Seller insurance costs may not reflect current replacement costs or market pricing.
During due diligence, investors should obtain updated insurance quotes and review:
Flood coverage
Wind coverage
Deductibles
Replacement cost assumptions
Insurance analysis is an important part of risk management.
Utilities
Utility costs vary based on property structure and utility setup.
Common structures include:
Master-metered utilities
Separately metered utilities
Water and sewer expenses have increased in many markets, making utility management increasingly important.
Utility bill-back programs may help reduce net operating costs, depending on property structure and local regulations.
Payroll and Property Management
Staffing needs vary based on:
Property size
Property layout
Operational strategy
Service level
Property management fees are commonly underwritten as a percentage of collected income.
Accurate payroll budgeting should reflect realistic local labor costs and operational needs.
Repairs and Maintenance
Repairs and maintenance expenses are heavily influenced by:
Property age
Deferred maintenance
Construction quality
Operational efficiency
These are common areas where investors underestimate future costs.
Conservative underwriting typically uses market-based expense ranges and includes contingency buffers.
Turnover and Make-Ready Costs
Turnover expenses include:
Cleaning
Painting
Flooring repairs
Leasing costs
Lost rent during vacancy
Costs vary based on:
Property class
Renovation scope
Labor costs
Tenant profile
Turnover assumptions directly impact NOI projections.
Marketing and Leasing Expenses
Marketing and leasing expenses may include:
Online advertising
Listing services
Resident retention programs
Leasing incentives
Broker commissions
Leasing costs vary significantly by market conditions and turnover levels.
Administrative Expenses
Administrative costs may include:
Legal
Accounting
Software
Office operations
Licensing and compliance
These costs are recurring and should not be overlooked during underwriting.
Reserves for Replacements
Reserves help prepare for future capital needs.
Examples include:
Roofs
HVAC systems
Parking lots
Plumbing systems
Even if lenders do not require reserves, prudent operators budget for future replacement costs.
Unexpected expenses are common in real estate operations.
Typical Operating Expense Ranges
Operating expense ratios vary based on:
Property class
Age
Market
Condition
Operational efficiency
Generally:
Class A properties operate at lower expense ratios
Class C properties operate at higher expense ratios due to increased operational intensity
Expense benchmarks should always be adjusted for market conditions and property specifics.
Analyzing Seller Expenses
Seller financials should always be verified independently.
Key questions include:
Are expenses understated?
Are categories missing?
Is deferred maintenance being ignored?
Have taxes and insurance been updated?
Comparing seller expenses to market benchmarks helps identify operational risk.
Conservative Underwriting Principles
Conservative underwriting protects against execution risk.
Experienced operators:
Use realistic expense assumptions
Build contingency buffers
Maintain strong cash reserves
Adjust for reassessed taxes and updated insurance costs
Unexpected costs are a normal part of property operations.
Red Flags in Expense Analysis
Common red flags include:
Expenses significantly below market benchmarks
Missing expense categories
Deferred maintenance
Outdated insurance assumptions
Unadjusted property taxes
No reserves for replacements
Significantly understated expenses increase execution risk and require deeper analysis.
CREI Partners’ Approach
At CREI Partners, expense analysis focuses on conservative underwriting and independent verification.
The process includes:
Comparing seller expenses to market benchmarks
Adjusting taxes based on purchase price
Obtaining updated insurance quotes
Budgeting conservatively for repairs and turnover
Maintaining reserves and operating buffers
The goal is to build durable cash flow assumptions—not optimistic projections.
Episode Highlights
[00:00] Introduction to operating expenses
[01:30] OpEx vs CapEx
[03:00] Property taxes and reassessment
[05:00] Insurance analysis
[06:30] Utilities and bill-backs
[08:00] Payroll and management costs
[09:30] Repairs and maintenance
[11:00] Turnover and make-ready costs
[12:30] Marketing and leasing
[13:30] Reserves and underwriting
[15:00] Red flags and CREI approach
Resources Mentioned
Multifamily expense benchmarking tools
Property tax estimation resources
Insurance underwriting tools
Utility bill-back analysis platforms
Maintenance and turnover budgeting templates
Let’s Talk
If you’re underwriting a multifamily deal and want help evaluating operating expenses or budgeting assumptions, let’s talk.
Schedule a call with our team:
https://calendly.com/shelbi-creipartners/30min
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Next Episode
Next week, we continue our multifamily underwriting series with rent comps, market positioning, and value-add analysis.
Disclaimer
This podcast is for informational purposes only and should not be considered legal, tax, or investment advice. Always consult with qualified professionals before making investment decisions.
Keywords
multifamily operating expenses, multifamily underwriting, apartment expense analysis, property tax underwriting, insurance underwriting, multifamily budgeting, repairs and maintenance, NOI analysis, commercial real estate expenses
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