Operating Expenses
What belongs in the expense column, what's routinely understated, and how to build a defensible expense picture.
AuthorKitsey Behrman
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What It Means
Operating expenses are the recurring costs of running a property: taxes, insurance, utilities the owner pays, maintenance, landscaping and snow removal, management, and administrative costs.
They exclude the mortgage and capital improvements, but a realistic underwriting model still sets aside reserves for the roof, paving, and mechanical replacements that arrive on a longer cycle.
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Why It Matters
Every dollar of understated expense inflates net operating income and, at a 6% cap rate, overstates value by roughly sixteen dollars. Expense accuracy is valuation accuracy.
Expenses also change with ownership. Taxes can reassess at your purchase price, insurance can reprice, and a seller who self-managed leaves out a cost you will likely pay.
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Questions to Ask
- Can I see three years of actual operating statements and tax bills?
- Will property taxes reassess after the sale, and at what estimated amount?
- What management fee applies if I don't manage it myself?
- What insurance premium has an agent actually quoted for this building?
- What reserve per square foot is appropriate for a building of this age?
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Common Mistakes
- Using the seller's tax bill instead of the reassessed amount.
- Excluding management because the current owner self-manages.
- Omitting capital reserves entirely.
- Accepting a pro forma expense ratio with no historical support.
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Working With the Right Professionals
The most successful real estate decisions often involve collaboration between several professionals working toward the same goal. Understanding each person's role helps you ask better questions and make more confident decisions.
- Property management professionals
- Accountants, CPAs & Tax Professionals
- Property tax appeals & assessment professionals
- Insurance professionals & risk advisors
Western Edge Property Group provides these local resources as a convenience to help you begin your own research. Inclusion in this directory does not constitute an endorsement or recommendation. We encourage you to interview professionals, verify qualifications, and choose the provider who best meets your individual needs.
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- Environmental ConcernsWhen a Phase I assessment is appropriate, what triggers further study, and how findings affect financing.
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Have a question about this concept?
Every property and every investor is different. If this raised a question worth answering before you decide, I'd welcome the conversation.