The expense side of an apartment deal is where seller statements and reality most often part ways. A long-time owner may do repairs themselves, skip a management fee, carry an old insurance policy and pay taxes on a value that will change after the sale. None of that will be true for you. This guide lists the operating expense lines to budget for in a Seattle apartment building, explains how to estimate each one and shows why the seller’s total is only a starting point.
The expense lines
| Expense | Where the estimate comes from | Common gap in seller figures |
|---|---|---|
| Property taxes | County assessor records and the expected assessed value | Based on the old value |
| Insurance | A fresh quote for the building | Old policy or low coverage |
| Owner-paid utilities | Twelve months of actual bills | Missing months or estimates |
| Repairs and maintenance | Building age, systems and unit count | Owner’s own labor not counted |
| Turnover | Cleaning, paint and small repairs between tenants | Folded into repairs or left out |
| Management | A quoted percentage of collected income | Zero if self-managed |
| Payroll or on-site help | Needed hours and local wages | Family or tenant labor |
| Landscaping, snow, cleaning | Service quotes | Done by the owner |
| Administrative and legal | Accounting, software, notices, fees | Personal accounts mixed in |
| City registration and inspection | City fee schedule | Overlooked |
Property taxes and insurance
These two lines move the most after a sale. Taxes are driven by assessed value, and a purchase at a higher price can lead to a higher assessment over time. Insurance is priced to the building, its age, its systems and its claims history, and carriers look closely at older multifamily buildings. Get your own quote early rather than assuming the seller’s premium will carry over. The Seattle-specific side of taxes and utilities is covered in Property Taxes and Utilities for a Seattle Apartment Building.
Repairs, maintenance and turnover
Small owners often understate this line because they do the work themselves. Price it as if you were paying for every hour. Older buildings, buildings with original plumbing or electrical systems and buildings with high turnover need more. Keep turnover costs visible on their own line: each move-out usually means cleaning, paint, minor repairs and sometimes flooring or appliances, plus the vacancy covered in Vacancy, Concessions and Loss to Lease: The Gap Between Rent and Income.
Management, even if you plan to do it yourself
Include a management fee in your underwriting even if you intend to self-manage. Lenders usually include one, it keeps your numbers comparable with other buildings, and it makes sure the deal still works if you later hand management to a company. Your time has a cost too.
What does not belong here
Capital items, such as roof replacement, window replacement, a new boiler, siding or a full unit renovation, are not operating expenses. They are real costs, but they are lumpy and long-lived, so they are handled through a capital reserve and a separate budget. Loan payments stay out as well. Mixing either one into operating expenses makes NOI hard to compare with other buildings. See Physical Due Diligence and Capital Reserves for an Apartment Building for how to plan for capital items.
A four-step way to build the budget
- Collect the seller’s trailing twelve months, two prior years if available, and actual utility and tax bills.
- Adjust each line to the next owner: new tax estimate, new insurance quote, paid labor instead of owner labor, a management fee.
- Compare the total with similar buildings by looking at expenses per unit and as a share of effective income. A figure far below similar buildings needs an explanation.
- Document every assumption. When a lender or partner asks where a number came from, you will have the answer.
Tip: Expense ratios are a sanity check, not a budget. A building with owner-paid heat and an elevator will run very differently from a walk-up where tenants pay their own utilities.
Expenses that grow at different speeds
When you project expenses forward, avoid applying one growth rate to every line. Property taxes follow assessments and local levies, insurance can jump after a difficult year for carriers, utility rates change when the utility sets new rates, and repairs rise as a building ages. Payroll follows local wages. Giving each major line its own assumption makes the projection more honest and shows which costs the deal is most exposed to.
It also helps to separate controllable costs, such as repairs, turnover and administration, from costs you largely cannot control, such as taxes and insurance. A buyer can plan to run a building more efficiently, but should not plan on paying less tax or insurance than the building’s size and value suggest.
Summary
Operating expenses are the half of NOI that buyers most often get wrong in the seller’s favor. Rebuild each line as you would actually run the building, keep capital items and debt service out, and compare the result with similar properties. Then carry it into your NOI, as shown in Net Operating Income: The Number Every Apartment Deal Starts With.