Introduction

Every investor wants to find that perfect real estate deal - the one that looks great, cash flows effortlessly, and delivers strong returns. But here’s the catch: Deals don’t fail because of unrealistic income projections alone. More often than not, they crumble under the weight of underestimated expenses.

It’s easy to focus on the revenue side of an investment. Rent projections, occupancy rates, and market growth. But the expense side? That’s where reality kicks in. If you don’t account for the true costs of running a property, your deal can go from success to failure in no time.

In this article, we're going to zoom in on EXPENSES - the part of the deal you truly can’t afford to ignore.

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The Expense Side: Where Deals Can Go Under

One of the biggest mistakes in underwriting a deal? Underestimating expenses. It’s easy to be optimistic when it comes to cutting costs on a property, but some expenses can’t be manipulated! Here’s what to watch for:

• Maintenance is your biggest reality check.

Cutting corners on maintenance doesn’t just hurt your bottom line - it can kill your deal entirely.

If a property is currently operating at $1,200 per door in repairs and maintenance, and your underwriting slashes that number to $350 per door, is that realistic?

Repairs and maintenance aren’t luxuries - they’re necessities. Every property requires ongoing upkeep, from plumbing fixes to roof repairs. Without proper budgeting, deferred maintenance piles up, leading to bigger, costlier problems down the line.

• Utilites don't lie - Review every bill

Unlike some expense categories, utilities are a fixed reality, with hard paper trails as to how much the utilities in the building cost. There’s no fudging or playing games with this one. 

This is where you can have the power of knowledge. Take the time to review historical utility bills so that you can accurately gauge what this expense costs the property overall.

• Presentation matters - attracting and retaining tenants costs money

Think of your property like a storefront - if it doesn’t look appealing, customers  - or in this case - tenants, won’t come in.

It’s easy to ignore cleaning contracts, landscaping, and common area maintenance when trying to squeeze the budget. But the reality is, a poorly maintained property will drive tenants away.

A strong investment isn’t just about cutting costs - it’s about balancing expenses with whatever is needed to attract and retain tenants.

All in all - budget realistically!

Aggressively cutting costs that simply can’t be reduced will just cost you in the long run!

If plumbing issues arise, or HVAC units fail, you have to fix them - there’s no getting around it. Assuming you can operate a large apartment building with little to no emergency repair costs is a recipe for disaster. Plan for the unexpected!

And the cost of getting it wrong?

There are no hard rules for expenses, but there is one certainty. If you don’t budget properly, you’ll run out of money - and that can sign the death of your deal.

Once cash runs dry, you’ll be stuck. Investors won’t wait forever, and you can’t magically conjure up operating funds after the fact.

This is why real estate success isn’t just about “a good deal”. It’s about knowing what it really costs to keep that deal alive.

Stay tuned for the next part of our series, where we’ll dive into more real-world insights on underwriting smarter deals.