Multifamily Operating Expenses: A Comprehensive Guide

If you're investing in multifamily properties, operating expenses are an unavoidable reality that can significantly impact your bottom line. The costs of running apartment complexes — maintenance, repairs, property taxes, insurance, utilities, payroll, and more — quickly add up.

Gaining a firm grasp of multifamily operating expenses helps drive profitability and the long-term viability of your investment business, but it's not always easy to understand the full scope of expense categories and costs involved, especially when you're just starting out.

That's where this guide comes in — we'll break down the typical operating expenses you can expect to encounter as a multifamily investor, and you'll learn proven strategies for tracking your property's financial performance against industry benchmarks and standards.

You'll also discover practical tips and best practices for optimizing costs in areas like maintenance, vendor management, leveraging technology, and more. We'll help you reduce your operating expenses without sacrificing the quality and appeal of your properties.

What are multifamily operating expenses?

Multifamily operating expenses are the regular costs of running and maintaining a rental property every day. These expenses help keep the property in good shape, attract and keep tenants, and make sure that the investment yields a profit.

These expenses are routine and recurring, and you can deduct them from your rental income on your Schedule E.

What isn't an operating expense?

Capital expenditures (CapEx) are the costs to upgrade or maintain physical assets like property, technology, or equipment. These expenses add value to the property or extend its life, and you depreciate them over time.

Examples include:

• Major renovations and improvements, such as adding a new roof.
• Replacing major systems like HVAC or electrical systems.
• Expansions, new facilities, or significantly upgrading existing ones.

Key differences between expense types

Some of the main differences between capital expenditures and operating expenses include:

• Deductibility: Operating expenses are deductible in the year they occur, while capital expenditures must be capitalized and depreciated over several years.
• Purpose: Operating expenses are for maintaining current conditions; capital expenditures generally enhance the asset's value or extend its life.
• Frequency: Operating expenses are recurrent and expected. Capital expenditures are typically infrequent and involve larger sums of money.

Benefits of managing operating expenses successfully

Part of your investment's success is how you manage your multifamily operating expenses. Having a good operating expense ratio that gives you higher profits impacts your property in the following ways:

Maximizing profitability and value

Reducing operating expenses directly increases the property's net operating income (NOI), which enhances its profitability.

Properties that have finances and lower operational costs are also more attractive to potential investors or buyers who want to invest in assets with good financial health.

Budget control

Effective management aids in better forecasting and controlling budgets. This helps property owners to allocate funds more efficiently and plan for future expenses or investments.

Attracting and retaining tenants

Well-maintained properties with reasonable operating costs mean you can offer competitive rents, which can help you attract and retain tenants. High tenant retention reduces vacancy rates and the costs associated with acquiring new tenants.

Risk mitigation

Managing your multifamily operating expenses can help mitigate risks associated with unexpected repairs and maintenance. You can create a budget with sufficient reserves to cover these costs without needing to drastically increase rents.

The 8 major multifamily operating expenses

Let's cover all of the typical multifamily property operating expenses you can expect for your apartment building:

1. Administrative

Administrative costs that support your property's operations include:

• Office expenses: Supplies and equipment needed for the property management office, such as computers, printers, paper, and other office supplies.
• Software subscriptions: These are costs associated with property management software, which helps track rent payments, maintenance requests, and tenant communications.
• Legal and professional fees: This category includes expenses related to the services of attorneys, accountants, and consultants. These professionals help verify compliance with housing regulations, prepare financial statements, and provide guidance on legal matters.

2. Insurance

Having the right insurance for your multifamily property keeps your investment safe and gives you peace of mind, knowing you're financially protected if anything unexpected happens. Types of insurance coverage include:

• Property insurance: This insurance covers the buildings on your property, like apartments and common areas, protecting against damage from fire, vandalism, theft, or natural disasters. It makes sure repairs or rebuilding can happen if the property is damaged, reducing financial losses for the owner.
• Liability insurance: This insurance protects property owners from legal claims when negligence on the property injures someone or damages their property. It covers legal fees, medical costs, and potential settlements, giving the owner financial security.
• Workers' compensation insurance: You need this insurance if you have on-site staff or contractors. It offers financial support and medical care for employees or contractors who get injured or ill due to work-related reasons. This insurance helps you meet compliance with legal obligations.

3. Maintenance

Maintenance costs are all the tasks and repairs you must allocate to take care of the property. Key categories that should be part of your regular maintenance checklist include:

• Plumbing: Regular inspections and timely repairs of leaks, clogs, or broken fixtures prevent water damage and keep the living environment functional for tenants. Proactive measures such as pipe insulation can help you avoid future problems and minimize maintenance costs.
• Electrical systems: Promptly address electrical issues to verify tenant safety and prevent potential fire hazards. Regularly updating old wiring and outlets can help maintain the property's electrical infrastructure and avoid costly repairs.
• Appliances: Efficient repair or replacement of malfunctioning appliances keeps tenants happy and minimizes disruptions. Regularly service appliances to extend their lifespan and prevent unexpected breakdowns.
• Interior maintenance: Periodic updates to interior paint and flooring provide an appealing and comfortable living environment for tenants. These updates can also help attract new tenants and justify rent increases.
• Pest control: Implementing a regular pest control program can prevent infestations and maintain a healthy living environment. Proactive pest control measures can help avoid costly remediation expenses and potential legal issues.
• Landscaping: Keeping a clean outdoor space enhances the property's curb appeal and contributes to tenant satisfaction. This includes regularly mowing the lawn, trimming overgrown vegetation, and removing debris. Proper landscaping maintenance can also help prevent damage to the property's exterior and infrastructure.
• Sidewalks and parking: Promptly repairing cracks, potholes, and other damage to walkways and parking areas helps prevent accidents and ensure tenant safety. Addressing these issues in a timely manner also minimizes liability risks for property owners.
• Building exterior: Regularly addressing wear and tear to the building's exterior, such as painting, caulking, and repairing damage, helps preserve the property's structural integrity. These proactive maintenance measures also maintain the building's aesthetic appeal.

4. Marketing and advertising

Marketing and advertising expenses are costs associated with promoting your multifamily property to potential tenants and maintaining high occupancy rates. These expenses are required for attracting new tenants, reducing vacancy periods, and generating steady rental income. Typical marketing and advertising expenses include:

• Listing fees: Listing your available units on popular rental platforms and websites often comes with associated fees to help your property be seen by a wide audience of potential tenants.
• Promotional materials: Creating and distributing promotional materials such as brochures, flyers, and signage helps to showcase your property's unique features and amenities. These materials help potential tenants understand what sets your property apart from competitors.
• Online advertising: Investing in targeted online advertising campaigns can help you reach a specific audience of potential tenants based on demographics, location, and other relevant factors. Platforms like Google Ads and Facebook Ads allow you to create targeted campaigns that maximize your return on investment.
• Resident events and community engagement: Hosting resident events and fostering a sense of community within your multifamily property can help attract and retain tenants. Expenses related to these events may include food, decorations, and entertainment costs.
• Professional photography and videography: High-quality photos and videos of your property can have a large impact on potential tenants browsing listings online. Investing in professional photography and videography services can help showcase your property's best features and create a strong first impression.
• Website development and maintenance: A well-designed, user-friendly website helps your apartment complex attract potential tenants and provide them with key information about your property. Expenses related to website development, hosting, and maintenance should be factored into your marketing and advertising budget.

5. Payroll

To run a successful apartment building, you need a great team. Paying these team members will be one of your larger operating expenses. Typical team members include:

• Property manager: A property manager oversees the daily operations, tenant relations, and overall management of the property. Their responsibilities include enforcing lease agreements, coordinating maintenance and repairs, and confirming compliance with local housing regulations.
• Leasing agents: Leasing agents handle tenant recruitment, show available units, process rental applications, and execute lease agreements. They play a key role in maintaining high occupancy rates and minimizing vacancy periods.
• Maintenance staff: Maintenance staff handle the upkeep and repair of the property, including plumbing, electrical, and HVAC systems. They help keep the property in good condition and support tenants' maintenance requests.
• Groundskeepers: Groundskeepers maintain the property's outdoor areas, including landscaping, lawn care, and snow removal. They help enhance the property's curb appeal and provide a safe and attractive environment for tenants.
• Custodial staff: Custodial staff keeps common areas and amenities clean and presentable. They contribute to tenant satisfaction by maintaining a hygienic and inviting living environment.
• Security personnel: Security personnel are responsible for maintaining the safety and security of the property and its residents. They monitor the premises, respond to emergencies, and enforce property rules and regulations.
• Administrative staff: Administrative staff assists with office duties, tenant communications, and financial record-keeping. They support the property manager in running the property smoothly and maintaining accurate documentation.

6. Property taxes

Property taxes are operating expenses levied by local governments on multifamily property owners. These taxes are based on the assessed value of the property and are used to fund various public services. Key considerations when budgeting for property taxes include:

• The assessment process: The assessment process determines the taxable value of your multifamily property. Local tax assessors consider factors such as the property's location, size, age, condition, and recent sales of comparable apartment buildings in the area. The assessed value may fluctuate, impacting your property tax obligations.
• Local tax rates: Local governments set tax rates based on their budget requirements and the services they provide. These rates are applied to the assessed value of your property to calculate your property tax bill. Monitoring changes in local tax rates can help you plan accurate budgeting for property taxes.
• Exemptions and abatements: Some jurisdictions offer property tax exemptions or abatements for certain types of multifamily properties, such as affordable housing or senior living. You should explore these incentives to reduce your tax obligations and minimize expenses.
• Appealing assessments: If you believe that your property's assessed value is inaccurate or unfair, you might be able to appeal the assessment with the local tax authorities. This process may require the assistance of professionals, such as appraisers or attorneys, to present a case for a revised assessment.
• Planning and budgeting: Proper planning and budgeting can help you manage property tax expenses effectively. Allocating a portion of rental income or establishing a dedicated fund for tax payments can help you make timely payments and avoid penalties.

7. Replacement purchases

Replacement purchases are apartment operating expenses incurred when replacing worn-out or obsolete building components and equipment in your property. These purchases help maintain the property's value, provide tenant comfort, and prevent more costly repairs.

Some replacement purchases may be considered capital improvements, which should be accounted for in your overall budgeting, even though they don't get categorized as operational expenses. Key replacement purchase categories include:

• Appliances: You'll need to replace appliances, such as refrigerators, stoves, and dishwashers, when they reach the end of their useful life. Upgrading to energy-efficient appliances can save you money in the long term, improving tenant satisfaction and minimizing the need for frequent repairs.
• Flooring: Replacing worn-out flooring in apartments and common areas helps maintain the property's appearance and provides a healthy living environment. New flooring can also contribute to the property's overall value.
• Plumbing fixtures: Replacing old toilets, sinks, and shower heads with new fixtures can help keep tenants happy and minimize the risk of leaks and water damage.

• HVAC systems: Heating, ventilation, and air conditioning (HVAC) systems require replacement when they become inefficient or unreliable. Installing new HVAC systems can improve indoor air quality and provide consistent temperature control for tenants.
• Roofing: The roof of a multifamily building should be replaced every 15-20 years, depending on its condition and material. A new roof protects the building from weather-related damage, prevents leaks, and maintains the property's structural integrity.

8. Utilities

Utility expenses are ongoing costs associated with providing essential services to tenants in an apartment building. These expenses include electricity, water, sewage, gas, and other services necessary to keep a home comfortable and livable.

Utility expenses can vary depending on factors such as the property's size, age, and location, as well as tenant usage patterns. Utility expense categories typically include:

• Electricity: Electricity expenses cover the cost of powering common areas, outdoor lighting, and sometimes individual apartment units, depending on the lease agreement.
• Water and sewer: Water and sewer expenses include the cost of providing clean water to tenants and disposing of wastewater. These expenses may be based on a flat rate or metered usage.
• Gas: Gas expenses cover the cost of providing gas for heating, cooking, or other purposes, depending on the property's amenities and the terms of the lease agreement.
• Trash collection: Trash collection expenses cover the cost of disposing of tenant waste and maintaining a clean and sanitary living environment.
• Other utilities: Some properties may include additional utility services, such as cable or internet, in the overall utility expenses.
• Monitoring and budgeting: Closely monitoring utility costs and establishing a clear budget can help property owners manage these costs effectively. Regularly reviewing utility bills, identifying any unusual spikes in usage, and addressing potential issues can help minimize unexpected expenses and keep your property profitable.

Multifamily property financial metrics

Knowing the typical costs for running multifamily properties can help you understand where your property is succeeding and where it could be improved. In addition, it's a good idea to review the broader set of metrics, including:

Gross potential income (GPI)

GPI is the maximum possible income from all rentable units if the property is fully occupied and all rent is collected, providing a ceiling estimate for revenue. You can calculate it using the following formula:

GPI = Total Number of Units x Potential Rent per Unit x 12 (months)

For example, if you have 10 units in your apartment building renting for $1,200 per month, the GPI would be:

10 x 1,200 x 12 = $144,000

The maximum annual income from the property is $144,000.

Vacancy rate

The vacancy rate indicates the percentage of all units that are vacant or unoccupied over a specific period, affecting the overall income potential. To calculate the rate for your specific property, use our Vacancy Rate Calculator. You can also calculate vacancy rates using the following formula:

Vacancy Rate = (Number of Vacant Units / Total Units) x 100

For example, let's say you have 2 vacant units out of 20 total units, the vacancy rate is:

(2 / 20) x 100 = 10%

Your vacancy rate is 10%.

Net operating income (NOI)

NOI is the actual income generated from property operations after subtracting all operating expenses. It's a key metric in property valuation and profitability analysis. You can calculate it with the following formula:

NOI = Gross Operating Income - Operating Expenses

If your gross operating income is $130,000 and your operating expenses total $50,000, the NOI is:

130,000 - 50,000 = $80,000

The property's profitability before finance costs and taxes is $80,000.

Capitalization rate (CAP rate)

The CAP rate provides information on the potential return on an investment property. It indicates the income the property generates relative to its purchase price, and can be calculated as follows:

Cap Rate = (Net Operating Income / Current Market Value) x 100

If an apartment building generates a net operating income (NOI) of $120,000 and has a value of $1,500,000, the cap rate would be:

(120,000 / 1,500,000) x 100 = 0.8 or 8%

This means the investment yields an 8% annual return based on current market value.

Operating expense ratio

The operating expense ratio helps you to understand the performance and profitability of a multifamily property. It represents the proportion of the gross operating income consumed by your property's operating expenses.

Operating Expense Ratio = Total Operating Expenses / Gross Operating Income

For example, if a property has $500,000 in gross operating income and $200,000 in total operating expenses, the operating expense ratio would be:

($200,000 / $500,000) = 0.4 or 40%

The lower the operating multifamily expense ratio, the better, since it indicates more operating income and profit for the owner.

Cash flow

Cash flow measures the net amount of cash being transferred into and out of an investment after all expenses and mortgage payments have been made.

Cash Flow = Gross Income - Operating Expenses - Debt Service

If you have an apartment building that earns $200,000 in gross income with $80,000 in operating expenses and $40,000 in annual mortgage payments, the cash flow is:

200,000 - 80,000 - 40,000 = $80,000

In this example, the property generates a positive cash flow of $80,000 annually.

Return on investment (ROI)

ROI measures the percentage return on your invested capital in the property, assessing the efficiency of your investment. Calculate it using the following formula:

ROI = (Net Profit / Investment Cost) x 100

If you purchased a building for $1,000,000 and the net profit after one year is $100,000, the ROI is:

(100,000 / 1,000,000) x 100 = 10%

The ROI of 10% indicates the efficiency of the investment over the period.

Ways to reduce multifamily operating expenses

There are several strategies you can use to reduce your multifamily property's operating expenses. Our top tips include:

Cost-effective maintenance practices

Implementing cost-effective maintenance practices can help you reduce expenses and extend the life of your multifamily property's assets. Consider the following:

• Preventive maintenance: Make a schedule for preventive maintenance. This helps you catch problems before they turn into expensive repairs or replacements, and it can prolong the life of your property's systems and parts.
• Long-term planning: Plan for the long term by making a capital improvement plan. This plan should say when to replace or upgrade big systems like HVAC, roofing, and plumbing. Planning ahead helps you avoid surprise costs and make the most of your budget.
• Staff training: Spend money on training for your maintenance staff to help them expand their knowledge and expertise. Training programs mean you won't have to hire outside help as often.

Vendor negotiations and procurement

Strategic vendor negotiations and procurement practices can reduce your multifamily property's operating expenses. We suggest:

• Competitive bidding: Solicit bids from multiple vendors to ensure you're getting the best value for your money, considering factors such as price, quality, and reputation.
• Performance-based contracts: Establish contracts with vendors that include performance standards and incentives to maintain high-quality service and cost-effectiveness.
• Bulk purchasing: Explore opportunities to partner with other property owners or join purchasing groups to leverage economies of scale and secure better prices on supplies and services.
• Expense tracking: Implement a system to closely monitor and analyze your spending patterns, identifying areas where you can cut costs or negotiate better rates with vendors.

Use technology to manage expenses

Incorporating technology into your business strategy can streamline your multifamily property's operations, reduce costs, and improve overall efficiency. Ways that you can use technology include:

• Property management software: Use a comprehensive property management software solution like Azibo. An all-in-one platform can help you automate and centralize tasks such as rent collection, maintenance requests, and expense tracking. These software solutions save you time and minimize errors.
• Smart devices: Implement smart technology, such as programmable thermostats, leak detectors, and energy-efficient lighting. Investments in this area can prevent damage and simplify maintenance.
• Predictive analytics: Use data analytics tools to monitor your property's performance, predict potential maintenance issues, and identify opportunities for cost savings and operational improvements.

Professional services

Getting help from third-party experts can make managing expenses for your multifamily property easier. Here are the top resources you should consider:

• Property management: A good property management company can take care of all the daily tasks, like collecting rent, making repairs, and working with tenants. Even though hiring a property management company comes at a cost, they can help you scale so you can focus on growing your business.
• Financial advisors: Seek out financial advisors who understand real estate. They can help you make a financial plan, save on taxes, and confirm your investment fits with your overall financial goals.
• Legal and tax professionals: Multifamily properties can have complicated legal and tax considerations. Get advice from experts who know how to structure your investment, follow regulations, and pay less in taxes.

Breaking down the right apartment operating expense ratio

Managing multifamily operating expenses is an ongoing process that requires a proactive and strategic approach. Property owners should regularly review their expenses, benchmark against industry standards, and explore opportunities for cost optimization.

Adopting cost-effective maintenance, strategic vendor negotiations, technology utilization, and a mindset of continuous improvement can boost profitability. In addition, consider seeking guidance from experts to help provide insights and support for ways to reduce your property's operating expenses.

Managing operating expenses is a reality that property owners must face head-on. A disciplined and forward-thinking approach can help you control costs, enhance profitability, and position your investments for long-term success.

Multifamily operating expenses FAQs

What are non-controllable expenses in multifamily property ownership?

Non-controllable expenses in multifamily properties are expenses that the property owner has little to no control over, such as property taxes, insurance, and utilities. You must pay these fixed expenses regardless of the property's performance.

How do you calculate operating expenses for a rental property?

To calculate the operating expenses for a rental property, you'll need to consider property taxes, insurance, utilities, maintenance and repairs, property management fees, and any other recurring expenses associated with the property.

What percent of rent goes to operating expenses?

Typically, operating expenses consume 35% to 50% of the gross operating income from rent in multifamily properties. This range can vary depending on factors such as the property's age, location, and management practices.