Most investors use 40% expense ratios like it’s some kind of universal law.
It’s not.
And this lazy assumption is quietly destroying deals.
Here’s what actually happens when you default to 40%:
You underestimate expenses on older buildings.
You overestimate them on newer Class A properties.
You miss the deal-killing utility structures.
You ignore the property management fee variations that can swing your NOI by thousands.
I’ve seen investors walk away from solid deals because their generic 40% made the numbers look terrible.
I’ve also seen them buy disasters because 40% made a high-maintenance property look profitable.
The Real Range Nobody Talks About
Expense ratios range from 32% to 55% depending on age, class, location, and management structure.
A 1970s property in Minnesota will eat you alive at 40%.
A 2015 build in Texas might run closer to 35%.
Why the massive range?
Older buildings need more maintenance.
Cold climates drive up utilities.
Some management companies charge 8%, others charge 3%.
Tax assessments vary wildly by jurisdiction.
The 40% rule assumes all properties are the same.
They’re not.
How Smart Investors Actually Model Expenses
Smart investors build expense models, not expense guesses.
They break down utilities, maintenance, management, taxes, and insurance separately.
They adjust for building age, tenant profile, and local market conditions.
Start with historical data from the seller.
Cross-reference it with comparable properties.
Adjust for your management style and anticipated improvements.
For utilities, ask who pays what.
Tenant-paid utilities change your expense ratio dramatically.
For maintenance, factor in building age and deferred items.
For management, get actual quotes instead of assuming.
The Real Cost of Generic Assumptions
This isn’t about being perfect.
It’s about being directionally correct instead of generically wrong.
The difference between a 40% assumption and a proper expense analysis can easily swing your returns by 200+ basis points.
That’s the gap between a mediocre deal and a home run.
Or between a home run and a disaster.
I’ve watched investors miss out on profitable deals because they used cookie-cutter ratios.
I’ve also seen them overpay for properties that looked better on paper than they were in reality.
At Ironclad Underwriting, we teach investors how to build expense models that actually reflect reality.
No more generic ratios.
No more hoping your 40% guess is close enough.
Ready to stop guessing?
Schedule a call with me and let’s fix your underwriting.
