Multifamily Myths: Why You Don’t Control The Value Like Everyone Says You Do


When investing in single family homes, you have to sit around waiting for the market to appreciate to realize a higher value. When you own an apartment complex, you are in control. If you want the value to go up, all you have to do is raise rents and/or cut expenses. You’ll sometimes hear this called “forced appreciation,” and it’s so easy even a kid can do it. Or is it?

If you read my “Multifamily Myth” article on why multifamily is easy to value, you already know that multifamily is valued by calculating the Net Operating Income (NOI = income minus expenses) that the property generates and then dividing that income by the capitalization rate (Cap Rate). By virtue of the very nature of the calculation, it’s easy to see that raising the income would correspondingly raise the value. Thus, the myth is born that you can force the value by increasing the income or decreasing the expenses.

Raise the Income… But Can You?

Now, you know that there are two sides to the approach. Let’s begin with the income side. Increasing the income is easy—just raise the rent. Not so fast… your ability to do that is limited by the market. What are similar properties charging? Raising the rent will not raise your income if the apartments are empty.

If there is room in the rents, go for it. You should be charging market rates or you’re leaving money on the table. But there are other ways to increase income. One is to rent more apartments. Perhaps you need to spend more money on marketing to attract more tenants and fill your vacancies. Maybe you need a staged model unit to create an emotional reaction to rent units faster and perhaps for higher rent.

Another option is to charge back for utilities if you aren’t doing that already. Check your local laws about the limitations on doing so, and if allowed and the market will support it, you should be charging.

The most important thing in all of the above is the market. You can neither raise rents nor charge for utilities if you are already getting all the market will bear. It’s not as simple as just raising the income because you want to increase the value. When you hear people say that single family homes are at the mercy of market appreciation, realize that you are in the same boat with multifamily property—but the “market appreciation” that rules the day is appreciation in rental rates rather than home values. The bottom line: It is the market that raises the income, not you. Your job is just to facilitate it.

Related: Multifamily Myths: Why Economy of Scale Doesn’t Mean What You Think it Does

Lower the Expenses? Not So Fast!

So we all agree that raising the income has market-based limitations (we do agree, right?). But don’t despair; you can also raise the NOI by reducing expenses. Or can you? And if you do, will it matter?

Let’s start with “can you?” Sure, you can lower the expenses, but you’d better be prepared for the consequences if you cut the wrong ones or cut too much. Have you ever seen a broker’s pro forma showing $600 per unit per year payroll? If you’ve never owned a multifamily property, you might think this is ok, but experienced owners know otherwise. I suppose that if your unemployed relative (admit it…we all have one) were to run the place, you might get a break on the payroll—but if you hire a qualified employee and the right number of employees for the size of the property, it’ll cost you. Don’t let this be a surprise that catches you after acquisition, either. Plan for it in advance in your underwriting. You’ll pay somewhere between $1,100 and $1,300 per unit per year for payroll (or perhaps even more) depending on the property class, the area’s prevailing wages (think “cost of living”), and the size of the property (smaller properties have fewer units with which to amortize the cost).

Cut your payroll expense too far, and you’ll either have a lot of employee turnover (not good) or an understaffed property (worse). You can spot an understaffed property from the street; just look for the deferred maintenance. And as soon as you walk in the door of the office, you’ll immediately see further evidence of a property skimping on payroll.

Ok, forget payroll. Where else can you cut? How about marketing? This one is easy—simply stop running so many ads. Drop your website advertising campaigns. Stop working with apartment locators. Just rely on good old free classified listing sites. It’s very simple and straightforward… until your traffic starts to thin, leasing velocity drops, and vacancies increase. Now you’re offering concessions to get tenants to sign a lease or keeping your rents below market so that people will be attracted to you because of cheap prices rather than stellar marketing. Well, I guess this solution is out the window.

If you can’t cut payroll or marketing, you can surely cut administrative expenses, right? Use cheap property management software. Have fewer phone lines. Buy discounted copier toner. Don’t buy uniforms for your staff, just have them wear their street clothes. Be careful here, though. Lacking a professional look, callers getting busy signals, and having crummy rent rolls that no one can decipher might be cheaper, but that doesn’t make it better.

Do Expenses Even Matter?

Does it even matter? If you reduce your expenses, will you increase your property value? If you simply follow the formula of NOI divided by cap rate, it sure does matter. Appraisers to this, so if you are refinancing, cutting expenses matters. But let’s remember—in real estate investing, you make your money when you buy and you get paid when you sell. So what really matters is whether decreasing expenses increases the value in the sense of whether your buyer will pay you more for your property. Will they? Yes and no.

Professional buyers of income property don’t care much what your expenses are. They care what their expenses will be. Their expenses will be different than yours. In other words, I don’t care if you are running your property with $800/unit payroll. I know that it costs $1,200, so when I’m deciding how much to pay you for your property, I’m putting $1,200 in my model. All of that hard work skimping on payroll, dealing with subpar employees, being understaffed, and constantly dealing with employee turnover brought you nothing on the sale. I call that a sale fail. Same goes with property management, administrative costs, insurance, property taxes, repairs and maintenance, and marketing. I’ll use what I know from experience it will cost me to run your property, not what you’ve been spending.

But There is Hope…

Yes, you can make a difference—both to an appraiser and a buyer. There are two primary areas of focus: Utilities and contract services. Let’s start with utilities. As a buyer underwriting an acquisition, one of the few expenses I take at face value is the utilities expense. Reduce this, and you can see true forced appreciation. How? Install more water efficient plumbing fixtures. Landscape with less thirsty foliage. Bill back water expenses to tenants to encourage conservation. Shop around for better electric rates or install a solar system for the office and pool. Replace old, inefficient boilers with new, high-efficiency ones to cut your gas bill. I did this at one of my apartment complexes last year. It cost me $25,000, but it cut my gas bill by over $1,000 per month and got me another $150,000 when I sold it this year. How’s that for return on investment?

Related: Multifamily Myths: Why Inexperienced Investors Think They Can Raise a Million Dollars

What are contract services? This includes your landscape maintenance contract. The trash hauler. Security patrol. The pest control contract. Essentially anything that you contract out on a recurring basis at a fixed or semi-fixed cost (not to be confused with contracted labor, which is repair work handled by outside contractors—that’s in the repair and maintenance column but frequently misallocated). You can realize savings here by negotiating the best prices and using the forces of competition amongst vendors to get the best prices. These service contracts can be assumed by the buyer, and thus buyers typically take these expenses at face value, and less expense means more value.

Cutting Expenses Can Help Even Without Forced Appreciation

Forcing appreciation isn’t the only reason to cut expenses. There are ways to cut expenses without sacrificing the operations and performance of the property. These won’t likely give you any additional value, but they’ll give you more cash flow. They are:

  1. Challenging your property tax assessment. We all can agree that lowering taxes is good for cash flow.
  2. Containing insurance expenses. Shop around and get the best rates; just be careful when skimping on policy limits and playing with deductibles, as this can come back to haunt you.
  3. Monitoring vacant unit electric. Make sure that you are switching off the lights and not running the heat and AC unnecessarily in your empty units.

So what about the myth of forced appreciation? Is it real? I’d argue that it is, but it isn’t as easy as some may lead you to believe. And no matter what, you are still a slave to the market, like it or not.

Let me know your thoughts with a comment.

About Author

Brian Burke

Brian Burke has raised tens of millions of dollars from accredited investors and family offices during his 25+ year real estate investing career. His focus is on residential real estate but has also done development, self storage, and commercial deals. Brian has completed more than 500 single family flips and has acquired nearly 1,000 residential rental units comprised of large apartment complexes all the way down to single-family homes.


  1. Ben Leybovich

    The most difficult aspect of all of this is knowing what the expenses will be. This requires not only good knowledge of industry averages, but also knowledge of the mechanics of the specific asset, which allows us to underwrite the specific assets relative to those averages…

    Some things just require perspective that only comes with experience. Very hard to learn this stuff from the books 🙂

    Nice, Brian.

  2. serge s.

    Great article Brian. This one hits home, I’m the guy skimping on marketing and payroll although you probably wouldn’t know it if you walked into our office:) Your comment “All of that hard work skimping on payroll, dealing with subpar employees, being understaffed, and constantly dealing with employee turnover brought you nothing on the sale. I call that a sale fail.” I find this very interesting. I understand how YOU would not pay for that skimping yet brokers are so quick to present actuals that do try to capitalize on this skimping. These brokers call me weekly trying to convince me that I can skimp even more and squeeze a higher cap rate. I laugh it off BUT following these properties I notice that they all sell and they are getting asking price. This tells me that in today’s market, people are in fact falling for it and I wonder how real “sale fail” is today. I know we don’t buy multifamily with the expectation of selling it to the next sucker as an exit strategy but this is exactly what seems to be happening today.

    • Brian Burke

      Great point, Serge. If you read my comment to Ben I mentioned that inexperienced buyers make mistakes because they don’t know what they don’t know (I went into detail on this in an earlier Multifamily Myths article too). Sellers are hoping that these inexperienced buyers will find their property when they go to sell it–and some of those sellers get lucky. I’d bet that this is much more common in the “less than 100 unit” space, as buyers of larger properties tend to be more experienced (but not always!). That said, the sellers achieving these higher prices are not necessarily seeing the result of their expense cuts…they are also the benefactor of compressing cap rates, money desperately seeking a home, buyers under the gun in a 1031 exchange, and buyers underwriting to higher future rents. So don’t count on your payroll savings to be the catalyst to a higher exit–it could be the opposite if strategic spending can result in higher income.

      As for the brokers giving you encouragement to cut more…of course they are! They are trying to get you to list the property, and to list it with them. If they can convince you that you can do something that will cause the property to sell for more, you’ll see dollar signs and want to sell. Conversely, if your payroll was super high, the broker would be telling you that this is still a good time to sell because the buyers will throw out your high payroll and underwrite to lower payroll anyway (which must be true because I said that in the article LOL).

      So is the sale fail alive and well? I say we’re both right…it is, but all rules can be violated by the rule-breakers. 🙂

  3. Leonid Sapronov

    Brian, love the series. Even though I have next to zero experience with analyzing multifamily properties, I have looked at a couple and, like Ben says, estimating the expenses was by far the most difficult part of the analysis. And I personally got to witness (to my amazement) how far the pro forma information can be from reality and how even an experienced broker will allow many inaccuracies, misrepresentations and way too optimistic numbers to make their way into the offering memorandum. In one case, the seller of an apartment complex I looked at thought that the new owner would be able to lower the insurance premium from ~$8,500 to ~$6,000 per year, whereas in reality, after I obtained quotes from three different insurance companies, they all ranged $14,000 – $20,000! No wonder – the seller only had an actual cash value policy and was going on the assumption that the buyer would do the same. So back to you point – can’t skimp on anything, unless you have lots of experience and really know what you are doing.

    • Brian Burke

      Thanks for the comment, Leonid! You are right–and good for you for carefully evaluating the expenses and getting quotes. You also reinforced my point that the owner’s expenses don’t matter and buyers must underwrite to what THEIR expenses will be. Some buyers might be fine with high insurance deductibles and not acquire replacement cost coverage. Other buyers (like you) wouldn’t want that risk. Thus you see that two buyers underwriting the same property would arrive at two very different values and there is nothing that the seller can do about it.

  4. Timothy Lewis

    Brian, this is the first article I’ve read in this series. Great post! I’m going back to check out the others. I’m currently in the market for a MF (as a primary residence) or an SFH, so this is very timely and eye-opening. I’ve seen a few MFs that I believe are overpriced (after accounting for rehab costs) hit the market. Each sold at full list price. Thanks for helping me get to know what I don’t know.

  5. Ben Biggs


    Thanks for this, I was always scratching my head when I read about forced appreciation. Of course you can increase NOI, but guess what, you’re still bound by the PREVAILING CAP RATE of the market!!! I always found it fishy that authors breezed right past this point.


    • Brian Burke

      That’s true, Ben…you sure are! Assuming the market cap rate stays static you can create value by increasing the income, but you can only do that if the market allows. And if cap rates move against you, you are paddling upstream to some degree so you will see less increased value for the extra income.

    • Brian Burke

      So true! Of course there are the lazy owners that are skimping on payroll and marketing and that is why they are 70% occupied, so in some cases you CAN raise both the rent and occupancy…but not in every case. There are a lot of moving parts, it isn’t as simple as “just raise the rents”!

  6. Aleksandar P.

    Excellent piece Brian. The whole series is a terrific contribution to the learning process of us who are getting ready to dive into investing in MF properties. I particularly like that you accentuated utilities and contract cost as the area where to focus. Thanks for all of your help.

  7. I completely agree with the fact that the seller will have different expenses than the buyer. Just as an example, I use property management, while the former owner self managed. I have more vigorous screening for tenants, so it takes a little longer to fill units, meaning higher vacancy, but I have less turnover than the former owner. I spend more on maintenance because the prior owner left things broken, or half fixed, while I prefer having things repaired and working well. Also the prior owner bought the property 20+ years prior, and had a lower tax bill than I have. The prior owner also didn’t mind tenants paying the rent late because he had no mortgage.

    Almost every expense I have is higher than the prior owner’s, however due to buying the property for a good price, and planning well, I still make profit that is very close to what I projected at purchase.

    • Brian Burke

      Excellent points, Anthony…and is a real-life example of putting into practice what I described in the article. It’s OK if your expenses are higher than the seller’s, just so long as you knew that going in by properly underwriting. My goal with these articles is to put that into focus so that people don’t make the mistake of using the seller’s expenses and then get caught off-guard when the expenses go up, nor do they miss out on a good deal because they took the seller’s high expenses at face value when they could have done it cheaper if they properly ran the property.

  8. David Monroe

    Good article Brian. There are about 10 ways to valuate a multifamily property and cap rate is only one of them. Multifamily property is only valued with a cap rate is the biggest rumor of all. If the property is not stabilized, has below market rents, low occupancy and deferred maintenance, then rest assured a cap rate will not be used to value this property.

  9. I really enjoyed reading this article – a lot of great information. I had a specific question that I hoped the article would answer and I’m wondering if you could give me your thoughts. In terms of resale, do you think there is any value in delivering a small 3 unit multifamily vacant or partially vacant after rehab? We are in this situation, and not sure if we should start a new lease for one of the units just before we plan to sell.

    • Brian Burke

      While I may not have the correct answer for your specific situation, in general if it were me I would rent the units. This can work for you or against you so you must do it right. If you place a great tenant at full market rate with a good lease contract it would likely help you with the resale. If you place a subpar tenant or have a below-market lease or a poor contract it’ll work against you because now you’ve given your buyer a problem that they’ll need to fix and likely won’t be able to fix until the lease expires. If it were me, I’d lease two of the three units and then list. This leaves one vacant so you don’t alienate the potential owner-occupant buyer yet you’ve done a lot of legwork for the potential landlord buyer. Your plan may need to differ and you might want to get the opinion of the agents that you are interviewing for the listing. They might have specific local market knowledge that alters your course.

    • ryan rogers

      Russell could you expand on your thinking here?

      I’m possibly looking to expand into multis. I’m assuming your referencing the 1-4 units comping as residential vs. 5+ units comping as commercial? Thanks for your input ahead of time! 🙂

  10. Erik Nowacki

    @Brian Burke Thanks for a good article.
    I would like to contribute a cost savings tip, LED lighting for the common areas. I calculated a 200 day payoff for my California property. Well worth the time and expense.
    I like to buy complexes with high vacancies. If the occupancy is less than 90%, traditional bank financing is usually not available. Thus, the seller is usually very flexible on sales price and sometimes carries back a note.
    Once acquired, I increase NOI by bringing additional units back online. If I buy it right and stabilize the property, there’s usually a healthy increase in value. It’s one way to force an increase in NOI without being subject to the whims of the market.

    • Brian Burke

      That’s excellent advice, Erik! I’m actually doing that right now on a 276 unit property that I’m repositioning. We needed to replace the exterior lighting anyway so the incremental cost wasn’t too much but the utility savings will be nice and add much more capitalized value than the cost of the lights.

      And thumbs up to the value-add strategy. It’s the best way to hedge an uncertain future.

  11. Jason V.

    Thanks for the great article Brian! I definitely have a tendency to think that bigger must be better (or maybe that everyone else’s strategy is just better than mine) but this article really helps me to remember the grass is greener where you water it, and there are good deals to be found in every niche. So it’s both great info for if/when I ever plan to make the jump to bigger multi’s, as well as reminding me that everything has its own unique challenges. Thanks!

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