Multifamily pro formas are more frequently wrong on the expense side than on the revenue side. Revenue assumptions, market rents, occupancy rates, absorption timelines, receive careful attention and rigorous market analysis during underwriting. Operating expense assumptions often receive less scrutiny, partly because they are projected rather than observed and partly because conservative revenue assumptions are more visible to equity investors than conservative expense assumptions.
The consequences of operating expense underestimation are significant. Every dollar of underestimated annual operating expense reduces the property’s net operating income by a dollar, which reduces its stabilized value at a capitalization rate multiple. On a property valued at a 5% cap rate, a $100,000 underestimation of annual operating expenses reduces the stabilized value by $2 million. That is not a rounding error in a development feasibility analysis.
The Line Items Developers Most Consistently Underestimate
Property management fees. Professional property management typically costs 4% to 6% of effective gross income, not gross potential rent, but actual collected rent after vacancy. On a 150-unit property with average rents of $1,600 per month and 95% occupancy, effective gross income is approximately $2.7 million annually. A 5% management fee is $136,000 per year. Pro formas that use 3% management fee assumptions, or that assume the developer will self-manage at below-market management rates, understate this expense.
Maintenance and repairs. Multifamily maintenance costs for a newly constructed property run $800 to $1,200 per unit per year in the first several years after opening, rising as building systems age. Pro formas that use $400 to $500 per unit for a new property will be wrong before the first major HVAC or elevator repair cycle.
Capital reserves. Capital reserves, funds set aside for major repairs and replacements that occur infrequently (roof replacement, parking lot repaving, elevator modernization, HVAC replacement), are not optional for a well-managed property, but they are sometimes omitted from development-stage pro formas that focus on the first few years of operations rather than the full hold period. A reserve of $300 to $500 per unit per year is typical for a new multifamily property. A pro forma without a reserve line is underrepresenting the property’s true operating cost.
Property taxes. Property tax underestimation is one of the most common and consequential operating expense errors in multifamily development, because it is market-specific in ways that make it easy to get wrong if you don’t know the local tax environment. Texas, with no state income tax, has some of the highest property tax rates in the nation, effective rates of 2.0% to 2.5% of assessed value in many DFW and Houston submarkets. A $25 million multifamily project in Dallas carries a property tax burden of $500,000 to $625,000 per year. Pro formas assembled from out-of-state data or from comparable markets with lower property tax rates will underestimate this expense materially. In Washington State, where property taxes are lower than Texas, developers from Texas markets sometimes produce the inverse error.
Insurance. Multifamily property insurance costs have increased significantly in many markets since 2020, driven by increased storm losses, construction cost increases that raise replacement cost values, and insurer underwriting changes that have raised rates and reduced capacity. Gulf Coast markets, Houston, in particular, have seen the most severe insurance cost increases, with some properties experiencing premium increases of 30% to 50% over the past three years. Pro formas in Gulf Coast markets that use pre-2021 insurance cost assumptions are systematically understating current insurance expense.
Utilities in owner-paid structures. Properties where the owner pays certain utilities, water, sewer, trash, common area electricity, have operating expense exposure to utility rate increases that tenant-metered properties do not. The RUBS (Ratio Utility Billing System) and direct metering approaches that transfer utility cost responsibility to tenants add upfront capital cost (metering equipment installation, billing system setup) but reduce the operating expense risk associated with owner-paid utilities.
Operating Expense Benchmarks by Property Type
As a rough calibration framework for new multifamily construction in 2026 markets:
Operating expense ratio (OER), operating expenses as a percentage of effective gross income, typically runs 35% to 45% for a professionally managed conventional multifamily property. OERs below 35% in a pro forma for new construction should be scrutinized, they typically indicate missing expense line items rather than exceptional operating efficiency.
Per-unit operating expenses for new construction in Texas markets run $8,000 to $11,000 per unit per year for a professionally managed 100+ unit property, including management, maintenance, insurance, property taxes, and administrative costs but excluding debt service. In Pacific Northwest markets, the range is $10,000 to $14,000 per unit, driven by higher insurance, higher property management costs in tight labor markets, and higher utility costs.
Market-rate vs. affordable housing. Affordable housing properties (LIHTC, HUD) carry higher administrative operating costs than market-rate properties, the compliance monitoring, annual tenant income certification, and reporting requirements add administrative expense that market-rate properties do not carry. LIHTC operating expenses typically run 10% to 20% higher than comparable market-rate properties.
How Operating Expense Errors Affect Valuation
The most important reason to get operating expenses right is their effect on valuation. A stabilized multifamily property is valued based on its net operating income, revenue minus operating expenses, divided by the capitalization rate that reflects the market and the property’s risk profile.
A pro forma that underestimates annual operating expenses by $200,000 on a property underwritten at a 5.5% cap rate will overstate the stabilized value by $3.6 million. When the actual operating expenses materialize after stabilization, the property’s actual NOI will be $200,000 lower than projected, its actual stabilized value will be $3.6 million lower than the underwriting assumed, and the permanent loan that was sized based on the underwriting assumptions may not be achievable.
Related: Multifamily Development Services · Multifamily Pro Forma Construction Costs · Multifamily Development Timeline · Development Advisory Guide
Markets: Multifamily Development Dallas TX · Multifamily Development Houston TX · Multifamily Development Seattle WA