Managing expense growth: The major costs facing multifamily property owners

Managing multifamily expenses can feel like a balancing act—especially when these expenses start rising. Operating costs can hit your bottom line hard, making it harder to stay competitive or reinvest in your property. Knowing how to manage these costs effectively is essential for keeping your property profitable and tenants happy.

In this guide, we’ll explore the typical operating expenses for multifamily properties, key factors contributing to expense growth, and the financial impact on both landlords and tenants. You’ll also learn practical strategies to manage these rising costs effectively, including how technology can streamline operations and improve your net operating income (NOI).

What are multifamily operating expenses?

Multifamily operating expenses are the costs that keep your property running smoothly, from fixing leaky faucets to paying property taxes. Typical operating expenses for multifamily​ expenses fall into predictable categories like maintenance, utilities, and property management fees. They do, however, add up quickly, making it critical to track and optimize them wherever possible.

Fixed and variable multifamily expenses

Fixed multifamily expenses, like property taxes and insurance premiums, stay relatively stable year-round. Variable expenses, such as utility bills or repair costs, can fluctuate based on tenant usage or seasonal changes. Knowing the difference helps you plan budgets more accurately and identify areas for potential savings.

Typical operating expenses for multifamily properties

Multifamily properties come with a laundry list of multifamily expenses that property managers must handle. Big-ticket items often include property taxes, which are unavoidable, and insurance, which can vary widely depending on location. Maintenance and repairs, utilities, and administrative costs also make up a significant portion of your budget.

For example, utility bills alone can eat up to 10%–20% of operating costs in older, less energy-efficient buildings. By investing in upgrades like LED lighting or low-flow faucets, you can reduce these costs while appealing to eco-conscious tenants. Keeping track of these multifamily expenses is key to maintaining a healthy bottom line.

Examples of common multifamily operating expenses

  • Property taxes: Levied by local governments and based on the property’s assessed value.
  • Utilities: Includes water, gas, electricity, trash removal, and sewage.
  • Repairs and maintenance: Routine fixes (plumbing, landscaping) and emergency repairs (roof damage, HVAC issues).
  • Insurance: Both property and liability coverage.
  • Marketing and advertising: Attracting new tenants through listings, open houses, or promotions.
  • Administrative costs: Office supplies, accounting software, legal fees, and administrative staff salaries.

Key factors contributing to expense growth in multifamily properties

The rising costs of labor, utilities, and materials are driving up multifamily expenses across the board. In fact, the average multifamily expense per unit increased by 9.3% over a 12-month period through midyear 2023. Utility rates, particularly in regions like California, have seen sharp increases, leaving property managers scrambling to cut costs without sacrificing tenant satisfaction.

Another major factor is inflation, which affects everything from insurance premiums to maintenance supplies. External pressures, like regulatory changes and weather-related risks, can further add to the financial burden. Property managers must stay proactive to minimize these challenges and learn how to increase multifamily tenant retention.

Summary of key factors driving expense growth

  • Inflation: Impacts every category from labor to materials.
  • Utility price increases: Gas, electricity, and water rates have risen in many states.
  • Insurance premium hikes: Particularly in disaster-prone areas like Florida.
  • Labor shortages: Increased competition has driven up wages for maintenance and administrative staff.
  • Regulatory compliance: New laws often require costly upgrades to meet changing standards.

Impact of expense growth in multifamily properties

Managing expense growth requires a proactive approach that combines technology, strategic planning, and actionable insights. Multifamily property owners need to balance cutting costs without reducing the quality of services provided to tenants. By implementing a thoughtful multifamily operating expense ratio strategy, you can keep your operating expenses under control while still ensuring tenant satisfaction and property profitability.

Higher rent prices for tenants

When costs rise, landlords often have no choice but to pass them on to tenants through rent hikes. While this may cover expenses, it can make your property less attractive compared to competitors. Balancing affordability with profitability is crucial for retaining long-term tenants.

Reduced profitability

Rising expenses can shrink your net operating income (NOI), directly affecting your property’s value. For investors, this means reduced returns and fewer resources to reinvest in upgrades or amenities. If left unchecked, expense growth can jeopardize your property’s financial health.

Budgeting challenges

Unpredictable costs, like emergency repairs or fluctuating utility rates, can wreak havoc on your budget. Imagine setting aside funds for a capital project only to have a major HVAC system break down unexpectedly. Planning for contingencies is essential to avoid financial stress.

Here are a few proactive budgeting strategies:

  • Create a reserve fund for emergencies (5%–10% of annual operating costs).
  • Conduct annual budget reviews to adjust for inflation or market trends.
  • Use historical data to predict seasonal expense fluctuations (for example, higher heating costs in winter).

Cash flow reduction

Increased expenses cut into cash flow, which is critical for covering day-to-day operations. This can lead to delayed payments on loans or deferring necessary maintenance work. Over time, reduced cash flow affects not just operations but also investor confidence.

Operational inefficiencies

Expense growth often highlights inefficiencies in operations, such as outdated systems or poor vendor management. For instance, relying on manual rent collection can lead to delays and errors, increasing administrative burdens. Streamlining these inefficiencies is key to keeping costs under control.

Tenant satisfaction and retention

Rising costs can also translate into reduced services or amenities, frustrating tenants. For example, scaling back on landscaping or maintenance may save money initially but could drive tenants to seek better-maintained properties. Keeping tenants satisfied requires careful expense prioritization.

Investment and financing implications

Higher operating expenses can make it harder to secure financing or attract investors. For example, lenders might hesitate to fund properties with poor cash flow or high expense-to-income ratios. Managing these costs effectively is vital to maintaining your property’s market value and growth potential.

Strategies for managing expense growth in multifamily

Effectively managing expense growth in multifamily properties requires a combination of proactive planning, regular evaluation, and smart decision-making. Property managers must balance cost-cutting measures with maintaining tenant satisfaction and property value. Implementing targeted strategies like expense tracking, audits, and technology upgrades can help control costs while improving operational efficiency.

Expense tracking

Tracking every dollar spent is the first step toward smarter expense management. Use software to categorize expenses, identify cost trends, and flag anomalies. For instance, noticing a spike in water bills could alert you to a hidden plumbing issue before it gets worse.

Expense tracking best practices

  • Invest in property management software: Tools like MRI Software can automate tracking and generate detailed reports.
  • Set category-specific budgets: Monitor how much you’re spending on utilities, maintenance, etc., each month.
  • Review vendor invoices regularly: Look for errors, overcharges, or opportunities to negotiate better terms.

Regular financial audits

Regular audits ensure that your finances are transparent and efficient. They help uncover overcharges or unnecessary spending, such as paying for services you no longer need. Conducting quarterly reviews can save thousands by catching errors early.

Implementing cost-saving measures

Simple upgrades, like energy-efficient appliances or smart thermostats, can significantly cut costs. For example, upgrading to LED lights can reduce electricity bills by up to 75%. Negotiating bulk discounts with vendors is another practical way to stretch your budget further.

Practical cost-saving ideas

  • Energy-efficient HVAC systems: Reduce heating and cooling costs.
  • Preventative maintenance schedules: Avoid costly emergency repairs.
  • Water-saving technology: Install low-flow faucets and dual-flush toilets.
  • Bulk purchasing: Buy common supplies, like cleaning materials, in larger quantities for discounts.

Leveraging technology for better management and operational efficiency

Investing in multifamily property management software can streamline time-consuming tasks like rent collection and maintenance scheduling. Tools like MRI Software automate processes and provide insights into spending patterns. This frees up time and resources to focus on improving tenant experiences.

Manage expense growth with MRI Software

MRI Software’s multifamily solutions offer an all-in-one platform for expense tracking, tenant communication, and financial reporting. Our tools help landlords monitor operating costs in real-time, automate lease renewals, and streamline rent payments. By adopting our software, landlords can reduce inefficiencies and focus on boosting NOI and tenant retention.

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