Why Most Investors Get Operating Expense Growth Wrong (And How It's Destroying Your 5-Year Projections)

You run a 5-year pro forma on a multifamily deal.

You model expenses flat, or up 2-3% annually to match inflation.

You hit your return target and move forward.

Then reality shows up.

Property taxes jump 8% in year two after reassessment.

Insurance costs climb 12% because claims and catastrophe losses are repricing the entire sector.

Labor—if you're managing in-house—gets a wage bump you didn't bake in.

Utilities follow consumption patterns, not a straight line.

Your year-five cashflow doesn't match your model.

Your exit multiple doesn't pencil anymore.

Your IRR sits 200+ basis points below what you underwrote.

This isn't bad luck.

It's a broken assumption.

The One-Rate Trap

Most investors treat operating expenses like a single, unified thing that grows at one rate.

That's wrong.

Each expense category has its own trajectory.

And if you ignore that, your numbers will betray you on the back nine of your hold.

Property Taxes: The Reassessment Ambush

Property taxes don't grow evenly.

The first two years after acquisition, they stay relatively flat—you inherit the prior owner's assessment.

Then the county reassesses, and you take a step change, sometimes 20-40% higher overnight.

After that, you get modest annual growth until the next revaluation cycle.

If you model 3% annual growth across five years, you miss the reassessment spike entirely.

Your model looks conservative because it IS—but it's conservatively wrong in the other direction during the years that matter most for your exit valuation.

The fix is simple: call your county assessor's office and understand their reassessment schedule.

Find out when the next full appraisal happens.

Then model that spike explicitly in your pro forma, year by year.

Insurance: The Market Is Repricing Fast

Insurance is worse than property taxes because it's actively accelerating, not just following a known schedule.

The OM shows you the seller's premium.

That's useless.

It's old, it's their risk profile, and the insurance market has repriced hard over the past 24 months.

Get a fresh insurance quote during underwriting—not a verbal estimate, an actual binder.

Then stress it up 8-12% annually for the next five years, because that's the current trajectory of the insurance market.

A deal that looks fine at a 4% expense growth can blow up if insurance alone is running 10%.

This is especially critical if you're in a hurricane or wildfire zone.

Carriers are tightening risk appetite and hiking rates aggressively.

Don't assume the seller's rate. Verify it. Stress it. Then add a buffer.

Utilities: Consumption Patterns Matter More Than Inflation

Utilities follow consumption, not inflation.

If you're underwriting a value-add and your business plan is to improve occupancy and rent growth, consumption per unit stays relatively flat or drops slightly as tenants stabilize.

But on a hold, with stable occupancy and no major energy upgrades, utility costs follow regional price indices—which run 4-6% in most markets, not 2-3%.

Check your local utility commission's historical price growth for the past five years.

Use that number, not a generic inflation estimate.

It's more accurate and you'll look less surprised when the bill arrives.

Labor: The Wage Pressure Most Investors Miss

Labor is the wildcard that sinks most projections.

If you're self-managing, you're not modeling a cost at all—it's swallowed in your time.

If you're outsourced to a property manager, the management company locks in a fee (usually 3-5% of EGI), but that fee doesn't cover salary creep, turnover, or the rising wage pressure in your market.

In tight labor markets, on-site staff wages are running 5-7% annual growth.

That's nearly double inflation.

If your maintenance tech or leasing agent leaves and you have to replace them, you're hiring at the current market rate, not the rate they were making five years ago.

Research wage growth in your market for the specific roles you're staffing.

Build that growth into your numbers year by year.

Your future self will thank you when you're not caught flat-footed on a budget conversation in year three.

How to Underwrite Expenses the Right Way

Here's the actual process:

Segment your T12 into expense buckets: property taxes, insurance, utilities, payroll, repairs & maintenance, administrative, trash, and other.

Research the growth rate for EACH category separately, not one blended rate.

Property taxes: reassessment in year 2, then 2% annually after (example—verify with your assessor).

Insurance: 10% annually based on current market repricing (adjust for your risk profile).

Utilities: 4.5% annually based on regional utility commission data (adjust for your region).

Payroll: 5% annually based on local wage pressure (tighter markets run higher).

Everything else: 2-3%.

Now your model reflects reality, not a spreadsheet fairy tale.

When you stress-test, you can handle that +8% insurance spike without watching your whole deal collapse.

When the reassessment lands, it's already in your numbers.

Your exit cashflow doesn't surprise you.

The Discipline of Segmentation

The discipline to model expenses by category, not as a monolithic blob, is the difference between a real underwriting process and confident-looking garbage.

The best underwriters don't just guess better than everyone else.

They refuse to guess at all.

They dig into the data, ask the right questions, and model what's actually happening in their market—not what a generic pro forma template suggests.

That's how you build certainty, clarity, and confidence into your numbers.

If you want to learn how to segment expenses the right way—and build a stress-testing framework that actually catches these problems before you buy—check out the Free Underwriting Masterclass.

We walk through the T12 line by line and show you exactly which categories are moving fastest in your market, how to build realistic growth assumptions, and how to stress-test your model so nothing blindsides you at exit.

That's how you protect your returns.

By Jason L. Williams, Ph.D.