Expense Growth Assumptions in an Apartment Pro Forma: How to Set Them
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Expense growth is the yearly rate at which a pro forma assumes an apartment building's operating costs will rise. It deserves as much scrutiny as rent growth, because NOI is the gap between the two. Set it line by line rather than with one number: property taxes, insurance, payroll, utilities, repairs and management each move for different reasons. In the example below, the same building with income growing 3% a year is worth about $12.09 million after five years if expenses grow 2% a year, and about $10.54 million if they grow 5%, a gap of about $1.55 million at the same cap rate.
This post is part of our guide to real estate syndication. It pairs with our post on rent growth assumptions. Figures are as of November 2026 and the example is illustrative.
What does expense growth do to value?
A building has $1,140,000 of income and $540,000 of expenses, so $600,000 of NOI. Income grows 3% a year in every case. The figures are an example.
| Expense growth a year | Income in year 6 | Expenses in year 6 | NOI in year 6 | Value at a 6.0% cap rate |
|---|---|---|---|---|
| 2% | $1,321,572 | $596,204 | $725,369 | $12,089,480 |
| 3% | $1,321,572 | $626,008 | $695,564 | $11,592,741 |
| 4% | $1,321,572 | $656,993 | $664,580 | $11,076,331 |
| 5% | $1,321,572 | $689,192 | $632,380 | $10,539,673 |
Each point of expense growth moves the sale value by about half a million dollars here. With a loan on the building, the effect on investors' equity is larger still; see cap rate compression and expansion for how leverage magnifies a change in value.
How to set each line
| Expense line | What drives it | Where to check |
|---|---|---|
| Property taxes | Reassessment at sale, local tax rates, appeals | County assessor, your tax consultant; see property tax reassessment |
| Insurance | Market pricing, the building's loss history, location risk | Current quotes and renewal history; see apartment insurance costs |
| Payroll | Local wages, staffing plan | Your property manager's budget |
| Utilities | Rates, usage, bill-back policy | Utility bills in the T12; see utility bill-backs |
| Repairs and maintenance | Building age, renovation plan | T12, property condition report |
| Management fee | A percentage of collections | Management agreement; grows with income |
| Administrative and marketing | Software, leasing costs | T12 |
Two lines need special care. Property taxes often jump once at the sale and then grow more slowly, so model the reset in year 1 and a separate rate after it. Insurance can rise much faster than inflation in some markets; use the actual quote for year 1 and a rate based on recent renewals, not a general inflation figure.
What mistakes inflate a pro forma?
- One flat rate for all expenses, usually lower than taxes and insurance have been rising.
- Expense growth below rent growth for every year of the hold, which builds NOI growth into the model without saying so.
- Cutting expenses in year 1 below the T12 without a specific reason, such as a cheaper insurance quote in hand. See the first-year operating budget.
- Forgetting that a renovated building still ages. Repair costs may fall after a renovation, then rise again.
What should investors ask?
- What expense growth rate does the model use, by line?
- How does it compare with the building's history and local tax and insurance trends?
- Is expense growth lower than rent growth? Why?
- What are the returns if expenses grow 2 points faster than planned? See sensitivity analysis.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units from their friends and followers. The sponsor enters a few deal numbers and DoorRaise computes the projections on the deal page. DoorRaise forms the deal's LLC, prepares the offering documents, files Form D and verifies every investor's accreditation, in 506(b) and 506(c) deals. Investors fund by wire into escrow at Enterprise Bank & Trust. DoorRaise charges two flat fees: $1,500 to set up (non-refundable) and $5,000 a year for administration, the first year paid at closing from the money raised and only if the deal closes.
Test your expense assumptions in the free cap rate and DSCR calculator, then start your deal.
FAQ
What expense growth rate should I use for apartments?
Set it by line, from the building's history and local trends: property taxes and insurance often need higher rates than payroll or repairs. A single low rate for everything usually overstates NOI growth.
Should expense growth be lower than rent growth?
Not by default. If the model assumes it every year, NOI grows from the assumption alone. Justify any gap with specific reasons.
How do property taxes change after I buy?
In many places the assessed value resets toward the purchase price after a sale, which can raise taxes sharply in year 1. Model that reset, then a separate yearly rate.
Does the management fee grow with expenses or income?
With income, because it is usually a percentage of collections.
How much does expense growth change the sale value?
In the example, each point of yearly expense growth changes the year-6 value by about $500,000 on a building with $600,000 of starting NOI.
Sources
This article is general information, not legal, tax or investment advice. The example building and figures are illustrative. DoorRaise is not a lender, law firm, broker-dealer, investment adviser or funding portal.