Operating expenses in plain English
Operating expenses are recurring costs required to operate and maintain an income property. They commonly include property taxes, insurance, utilities, repairs and maintenance, management, landscaping, pest control, trash, accounting, legal, licenses, and other recurring services.
Common recurring operating expenses
| Category | What may belong here | What to verify |
|---|---|---|
| Property taxes | Current annual real-estate taxes and assessments | Tax bill, assessment record, exemptions, and post-transfer estimate |
| Insurance | Property, liability, flood, wind, and other required coverage | Policies, declarations, deductibles, coverage, and current quotes |
| Utilities | Water, sewer, electric, gas, trash, irrigation, and common areas | Bills, accounts, meters, leases, and allocation practices |
| Repairs and maintenance | Recurring service and ordinary upkeep | Invoices, work orders, bank records, and deferred maintenance |
| Management | Third-party fees or a realistic management allowance | Contract, fee schedule, services, and actual operating needs |
| Recurring services | Landscaping, pest control, cleaning, pool, elevators, security | Contracts, invoices, frequency, and current pricing |
| Administrative | Accounting, legal, licenses, permits, software, bank charges | Invoices, statements, and whether the cost is recurring |
Property taxes
Do not simply carry forward the seller’s current tax number. Florida property tax assessments can change after a transfer. The Florida Department of Revenue explains that when new real property is acquired, assessed value is generally set at just value, subject to the property’s facts and applicable law. Review the current tax bill and ask the property appraiser or tax professional about a reasonable post-transfer estimate.
Insurance
Historical premiums do not guarantee the buyer’s future premium, coverage, deductible, or eligibility. Obtain current quotes for the intended ownership, occupancy, construction, wind, flood, roof, electrical, plumbing, and loss-history profile. The insurer or licensed insurance professional—not the seller spreadsheet—answers the coverage question.
Utilities
Compare utility bills with leases and meter records. Identify owner-paid, tenant-paid, vacant-unit, and common-area usage. A shared-meter property may hide the consumption of individual units or systems, so use the shared-utilities guide where appropriate.
Repairs and maintenance
Ordinary repairs and maintenance are not the same as major replacement. Review invoices, work orders, bank statements, service contracts, and inspection findings. A low historical repair total may mean the property was recently improved, carefully maintained, self-managed, or simply under-maintained.
Property management
Do not automatically enter zero because the seller self-manages. The buyer may use a third-party manager, value personal time differently, or need leasing, collections, inspections, bookkeeping, maintenance coordination, and compliance support. Ask the manager what services and fees fit the property.
Landscaping, pest control, trash, and recurring services
Small recurring contracts can become a meaningful annual total. Review service frequency, included work, cancellation terms, current pricing, and whether the seller performs any work personally that the buyer would need to hire out.
Licenses, accounting, legal, and administrative costs
Depending on the property and jurisdiction, recurring costs may include business licenses, rental registrations, accounting, legal support, software, bank charges, inspections, or compliance services. Verify which costs are property-specific and which belong to the seller’s broader business.
Operating expense vs. capital expenditure
A recurring plumbing repair may be an operating expense. Replacing the entire plumbing system may be a capital expenditure. Routine roof maintenance differs from a roof replacement. Ask the CPA how to classify costs for accounting and tax purposes, and ask the contractor or specialist to explain scope and useful-life questions.
Operating expense vs. reserve
A reserve is money planned or set aside for future replacements or major maintenance. It is not automatically the same as the repair expense actually paid this year. Lenders may require reserves or replacement-reserve deposits, and underwriting treatment can differ from accounting treatment.
Vacancy, bad debt, and debt service are separate categories
| Category | Plain-English meaning | Why separation matters |
|---|---|---|
| Operating expense | Recurring cost of operating the property | Used in the operating picture and NOI analysis |
| Capital expenditure | Major replacement or long-life improvement | May not belong in ordinary recurring expense |
| Reserve | Planned funding for future replacements | May be treated separately by lenders and owners |
| Vacancy | Income not received because units are not occupied | Reduces effective income rather than acting like a utility bill |
| Bad debt | Billed income that is not collected | Needs separate income and collection review |
| Debt service | Mortgage principal and interest payments | Financing cost is not an ordinary property operating expense |
Trailing twelve months, year-to-date, and prior-year comparison
A trailing-twelve-month statement covers the most recent twelve months. A year-to-date statement covers part of the current year. A prior-year statement covers a completed earlier year. Compare all available periods because seasonality, tax timing, insurance renewals, repairs, vacancies, and one-time events can change the picture.
Seller summary vs. source documents
Fannie Mae’s multifamily income-analysis guidance uses historical operations and source information such as contracts, utility bills, real-estate tax assessments, insurance policies, and comparable assets. The educational lesson is simple: a summary should be tested against the records that created it.
Expense-normalization framework
| Step | Question | Possible source |
|---|---|---|
| 1. Record | What did the seller report? | Operating statement, T-12, year-to-date report |
| 2. Support | What source document supports it? | Invoice, bill, contract, statement, tax record, policy |
| 3. Explain | Was it one-time, missing, delayed, or unusually low? | Manager notes, work orders, correspondence, inspection |
| 4. Update | What current price or post-transfer amount is reasonable? | Quote, assessment estimate, management proposal, lender input |
| 5. Separate | Is it operating expense, capex, reserve, vacancy, bad debt, or debt service? | CPA, lender, appraiser, manager, contractor |
Buyer and investor due-diligence checklist
- Collect trailing-twelve-month, year-to-date, and prior-year operating statements.
- Match expense totals to invoices, bills, contracts, policies, tax records, and bank statements.
- Obtain current insurance quotes and review coverage and deductibles.
- Estimate post-transfer property taxes with appropriate professional input.
- Review owner-paid utilities and common-area usage.
- Separate ordinary repairs from major replacements and deferred maintenance.
- Include realistic management and recurring-service costs.
- Identify one-time costs, missing categories, seller-performed labor, and related-party expenses.
- Separate operating expenses, capex, reserves, vacancy, bad debt, and debt service.
- Ask the lender, appraiser, CPA, manager, insurer, attorney, title professional, and contractors how they treat the records.
Professional questions to ask
- Seller: What document supports each expense total, and which costs were paid personally or through another entity?
- Property manager: Which recurring costs and staffing needs are realistic for this property?
- CPA: How should each cost be classified and treated for accounting and tax purposes?
- Insurance professional: What current coverage, premium, deductible, and eligibility apply?
- Lender: Which expenses, reserves, and normalization adjustments will underwriting use?
- Appraiser: How will historical and market-supported expenses affect valuation?
- Contractor or specialist: Which items are ordinary maintenance and which require major replacement?
- Attorney or title professional: Are there contracts, assessments, licenses, or transaction obligations that affect the expense picture?
