Expense Ratios Matter More Than Rent Growth

Why Most Deals Break on Costs, Not Income

Raising rents is easy to model.

Controlling expenses is not.

And in real underwriting, expense ratios matter more than rent growth—because every percentage point you miss compounds forever.

I see this mistake constantly, especially in value-add multifamily and “workforce” portfolios:

• Aggressive rent growth assumptions

• Flat or shrinking expense ratios

• Pro formas that only work if nothing goes wrong

Then reality shows up.

Not as a rent problem—but as a cost problem.

Let me walk you through a real deal where this distinction changed the entire decision.

The Deal That Looked Fine—Until Expenses Told the Truth

I recently underwrote a 95-unit multifamily portfolio in Killeen, TX (three properties within blocks of each other).

At first glance, the deal looked serviceable:

• ~90%+ reported occupancy

• ~$725K annualized gross income (broker-adjusted)

• “Light value-add” narrative

• Recent CapEx already spent

On paper, the upside story was rent growth.

But the real risk wasn’t rent.

It was expenses.

Where the Pro Forma Broke

Here’s what surfaced once we stripped the story down to reality:

1. Taxes Were Understated

Property taxes were running ~$165K/year across the portfolio—and likely to reset higher post-sale.

That alone invalidated the broker’s forward NOI assumptions.

2. Insurance Was Rising, Not Flat

Texas multifamily insurance isn’t stabilizing—it’s escalating.

The trailing insurance cost was already ~$62K/year, with real exposure to future increases.

3. CapEx Was Being Disguised as “Past Spend”

Yes, ~$135K+ had been spent in the last 12 months.

No, that did not mean the asset was stabilized.

Remaining value-add CapEx was still conservatively $7K–$10K per unit, or $630K–$900K portfolio-wide.

4. Expense Timing Was Distorted

One-month booking of taxes and insurance artificially inflated T-12 NOI.

That’s not fraud—but it is misleading if you don’t normalize it.

The Real Math: Expense Ratios vs Rent Growth

Let’s be clear about something most investors underestimate:

Every 1% miss in expense ratio compounds forever.

Rent growth happens in steps.
Expense creep is permanent.

In this deal:

• A 3–5% expense miss erased the entire projected rent upside

• NOI durability collapsed under conservative stress testing

• DSCR margin disappeared without any dramatic vacancy event

The deal didn’t fail because rents were wrong.

It failed because the expense structure wasn’t durable.

Why Rent Growth Is the Weakest Lever

Rent growth depends on:

• Tenant tolerance

• Market momentum

• Economic stability

• Political risk

• Time

Expense control depends on:

• Asset quality

• Utility structure

• Insurance exposure

• Tax basis

• Operational discipline

Only one of those is truly controllable.

That’s why experienced operators focus on expense resilience, not just rent upside.

What I Look for Instead

Before I care about rent growth, I want to know:

• What happens if expenses run 5–10% higher than modeled?

• Does the deal still survive at today’s rates?

• Is NOI durable before value-add?

• Can this asset absorb tax and insurance resets without forcing a refi?

If the answer is no, rent growth won’t save it.

This Is Where Deal Structure Actually Matters

This is also why structure beats story.

A deal with:

• Lower leverage

• Seller financing

• Longer balloons

• Real DSCR margin

Can survive imperfect execution.

A deal that relies on rent growth to offset weak expense assumptions cannot.

This is the difference between engineering safety and hoping for upside.

The Real Takeaway

Most deals don’t fail because income was overstated.

They fail because expenses were understated.

Rent growth makes spreadsheets look good.
Expense discipline keeps deals alive.

Want Help Stress-Testing Your Expense Assumptions?

If you’re underwriting deals that:

• Only work at 35–40% expense ratios

• Assume flat insurance or taxes

• Require rent growth to survive debt

That’s exactly where I step in.

I work with investors to:

• Rebuild capital stacks around real NOI

• Stress-test expenses, not just income

• Engineer downside protection before offers are written

You can see how I work here:
👉 https://chadchoquette.com/how-i-work

And if you want help structuring or salvaging a deal before it traps capital:
👉 https://chadchoquette.com/deal-structure-services

If you want to know whether a deal is strong—or just optimistic—expenses will tell you the truth every time.