Multifamily property owners have been facing increased operating costs in recent years. Operators report that expenses have risen by 8 to 10 percent over the past year, and data from RealPage indicates that costs grew by 24.4 percent between 2021 and 2024, a rate higher than in the previous three years.
Despite these increases, rent growth has mostly leveled off, and concerns about tenant turnover have made owners hesitant to raise rents significantly. However, many long-term operators remain satisfied with their cash flow.
For example, an apartment property generating $100,000 in gross income and maintained at a 35 percent expense ratio would see expenses rise by $2,800 if costs increased by 8 percent. If rents rose by 3 percent, or $3,000, the net operating income would still increase by $200, even though expenses climbed nearly three times faster than income.
Not all properties fare equally well. Those with higher expense ratios—around 50 percent—are more affected by cost growth. Some owners have experienced more than 10 percent increases in expenses. Yet, many still own units priced below market rent, which allows for greater potential rent increases in the future.
The main point is that although expense growth has narrowed profit margins, overall revenue remains strong for many operators and continues to outpace expenses in some cases. This trend has reduced financial distress in the multifamily sector and led many owners to hold onto their properties rather than move into different asset types.
Some investors who are less comfortable managing rising expenses are turning to alternatives through 1031 exchanges. This strategy allows them to reinvest proceeds from property sales into assets such as net-leased retail or medical office buildings. In these arrangements, tenants take on more responsibility for operating costs like utilities and maintenance, providing owners with steady income and fewer management challenges.
Despite this option, many long-time apartment investors hesitate to enter new asset classes. The process can seem daunting after years focused on multifamily properties. However, for those seeking less active management and stable returns while limiting exposure to rising operating costs, a 1031 exchange could be an effective approach.
“Expense growth is real, and it’s reshaping the operating landscape. Yet many multifamily investors remain stable, supported by strong revenue and long-term ownership. For those ready to reduce management burdens while preserving or enhancing income, the 1031 exchange provides a potential path forward. The key is knowing your options — and having the right advisors to guide the transition.”
