Operating Expenses

Operating expenses are the recurring, day-to-day costs required to operate and maintain a rental property. These are the expenses that keep the property functioning, compliant, and attractive to tenants, and they are a core part of underwriting because they directly reduce the income you keep.

Operating expenses typically include items such as property taxes, insurance, routine repairs and maintenance, property management fees, utilities paid by the owner, landscaping, snow removal, cleaning for common areas, pest control, trash service, leasing and marketing costs, and general administrative expenses. The exact categories vary by property type and location, but the guiding idea is simple: if it is a normal, ongoing cost of operating the property, it usually belongs in operating expenses.

Operating expenses matter because small changes here can have an outsized impact on performance. Underestimating expenses can inflate NOI and make a deal look stronger than it really is, while accurate expense assumptions produce more reliable cash flow, DSCR, and return projections. Investors often validate operating expenses by reviewing historical financials, comparing against similar properties, and setting realistic budgets for maintenance and reserves based on the condition and age of the asset.

In underwriting, operating expenses are the key step between top-line income and NOI. Once you have a realistic income figure, operating expenses are what determine how much of that income becomes true operating profit.