What if you could buy the same income stream in any location, but some areas carried far less expense pressure than others?
Or does it make more sense to purchase a newer building with a much lower expense ratio, even if you have to pay more to get it?
Tim, an investor, learned the answer to that question the hard way. He started out buying B and C class buildings that needed a lot of renovation, chasing the higher cash flow of a heavy value-add strategy. Over time, though, he realized the burden of ongoing expenses was quietly eating into that cash flow on his older buildings.
He started trading up into Class A properties. Even though they were more expensive to purchase, the lower expense ratio typically netted him more at the bottom line.
For multifamily investors, the operating expense ratio (OER) is one of the most powerful single numbers on a deal. It tells you what share of gross income is consumed by the cost of running the property—before debt service—and it’s the lever that quietly separates a great market from a punishing one. Two buildings with identical rent rolls can produce very different cash flows once expenses are layered in, and those expenses are largely a function of where the property sits and how old the building is.
What the Expense Ratio Actually Measures
The operating expense ratio is calculated as total operating expenses divided by effective gross income (EGI). Operating expenses include:
- Property taxes
- Insurance
- Utilities (where owner-paid)
- Repairs and maintenance
- Payroll for on-site staff and management fees
- Marketing
- Turnover costs
It excludes capital expenditures, mortgage payments, and owner income taxes—those live further down the income statement.
Across stabilized U.S. multifamily, OERs commonly fall between 35% and 55%. Class A new construction in a low-tax Sun Belt market may run in the mid-30s, while a 1920s mid-rise in the Northeast can easily push past 60%. Underwriting a property with a market-blind 40% assumption is one of the fastest ways to overpay—or to lose out on deals from underwriting too conservatively.
Why Metro Area Drives So Much Variance
Most line items on a multifamily P&L are local. Five categories explain the bulk of the geographic spread.
Property Taxes
The single largest swing factor. Effective rates in Illinois, New Jersey, Texas, and parts of New York can exceed 2% of assessed value, while Arizona, Nevada, and Colorado often sit below 0.7%. Reassessment rules also matter—some states reset to market value on sale, instantly inflating year-one expenses.
Pennsylvania sits at 1.26% while Maryland averages 0.92% of value. Because PA does not reassess a new value at the time of sale, property taxes are typically higher on newer units than on much older ones, since newer properties carry a more recent value assessment. For a deeper look at underwriting this line item, see our guide on underwriting property taxes.
Insurance
Coastal Florida, the Gulf Coast, and California have seen premiums double or triple since 2020 due to hurricane, wildfire, and flood exposure. In some Florida submarkets, insurance alone now equals 15% to 20% of gross rents.
The good news: insurance costs for newer buildings are generally lower, since newer buildings use more fire- and disaster-resistant materials, attract higher-quality tenants, and meet modern safety standards. Before you buy, it’s worth working through the right insurance questions to ask.
Labor and Maintenance
Union markets—New York City, Chicago, San Francisco—carry materially higher payroll costs for qualified contractors. HVAC technicians and plumbers in coastal metros bill 50% to 100% more per hour than in the Midwest. Areas with higher minimum-wage requirements generally see higher overall labor costs as a result.
Utilities
Most landlords aim to shift utilities to the tenant side of the ledger, but where owners do pay, location has a tremendous bearing on those costs. Cold-climate markets pay for heat; hot, arid markets pay for cooling and water. California and the Northeast also carry higher per-kWh electricity costs.
Even locally within the Northeast, costs for items like sewer and water can vary significantly depending on whether a public or private utility provides the service—water costs can run twice as high in one borough as in a neighboring municipality, based on supply costs and efficiencies. See our tips on saving on utility costs.
Regulation
Rent stabilization, eviction moratoriums, lead and mold compliance, and local registration fees all add overhead—costs that rarely show up cleanly in a pro forma but compress the OER in practice. Understanding local inspection and building-monitoring requirements can make a significant difference in ongoing maintenance costs.
Many municipalities are now enacting lead-based inspections for both lead pipes and paint, and ensuring compliance for older multifamily properties can be a fairly significant expense.
How OERs Stack Up Across Major Metros
The table below shows representative stabilized OER ranges for institutional-quality multifamily across selected U.S. metros. Actual results vary by vintage, class, and management quality, but the relative ordering is durable.
| Metro Area | Typical OER | Key Cost Drivers |
|---|---|---|
| New York, NY | 55%–65% | High property taxes, rent regulation, union labor, aging building stock |
| Chicago, IL | 50%–60% | Some of the highest effective property taxes in the U.S., harsh winters, utility costs |
| San Francisco, CA | 45%–55% | Rent control, expensive maintenance labor, strict regulatory environment |
| Miami, FL | 45%–55% | Soaring insurance premiums (wind/flood), HOA-style amenities, hurricane risk |
| Houston, TX | 40%–50% | High property taxes (no state income tax offset), insurance climbing post-storms |
| Atlanta, GA | 38%–45% | Moderate taxes, lower labor costs, newer Sun Belt inventory |
| Phoenix, AZ | 35%–42% | Low taxes, modern construction, but rising water and cooling costs |
| Dallas–Ft. Worth, TX | 38%–45% | Property taxes high, but labor and utilities affordable |
The pattern is consistent: legacy gateway cities and high-tax Midwestern markets cluster at the top, while newer Sun Belt metros with lighter tax burdens and modern building stock sit at the bottom. Florida is the wild card—historically a low-OER market, it has migrated upward almost entirely on the back of insurance.
What This Means for Underwriting
A disciplined investor underwrites expenses bottom-up by line item rather than applying a generic ratio. That means pulling the actual property tax bill (and modeling any post-sale reassessment), getting at least two insurance quotes for the specific building, benchmarking payroll against comparable assets in the submarket, and stress-testing utility costs against a five-year historical envelope rather than just the trailing twelve months.
Equally important: the OER is not static. Insurance renewals, tax reassessments, and minimum-wage changes can move the ratio 300 to 500 basis points in a single year, especially in Florida, Texas, and California.
The Bottom Line
A 45% expense ratio in Phoenix and a 45% expense ratio in Philadelphia describe two very different deals—one is at the top of its market’s range, the other may be mid-range.
Knowing where each metro typically lands, and which class of building is producing the input, is the difference between underwriting that holds up and underwriting that surprises you in year two.
For Tim, fewer surprises meant buying in lower-volatility markets and favoring newer-built properties to simplify expenses. That simplifies the return and reduces the chance that NOI gets squeezed by forces outside his control.
If you’re an investor looking to make more calculated, informed decisions, you’re in the right place. Contact us for a strategy call, and let’s make sure your next acquisition has a solid base for long-term cash flow growth.
