How Property Taxes and Insurance Erode ROE Over Time

Most landlords focus on two variables when projecting returns: rent growth and appreciation. These are the optimistic inputs, the ones that make spreadsheets look encouraging. But there are two line items that quietly compound against you every year, often faster than rents grow: property taxes and insurance premiums.

In many markets, property taxes have increased at 4% to 6% annually over the past decade. Insurance premiums, particularly in coastal and disaster-prone areas, have climbed at 7% to 12% annually since 2020. Meanwhile, rent growth in the same markets has averaged 3% to 5%.

When your expenses grow faster than your income, the effect on return on equity is relentless. It does not show up as a crisis. It shows up as a slow, year-over-year erosion that is nearly invisible in monthly cash flow statements but devastating when you model it over a decade.

The Expense Growth Rate Problem

The fundamental issue is that expenses are growing faster than income. When that happens, your net operating income (NOI — that is, your rental income minus operating expenses, before debt payments) shrinks as a percentage of revenue every year. Even if both rents and expenses are increasing, the gap between them narrows, and that narrowing directly lowers your ROE.

Here is the math behind the problem:

• Rent growth: Typically 3% to 4% annually in stable markets
• Property tax growth: 4% to 6% annually (driven by reassessments and municipal budget pressures)
• Insurance premium growth: 5% to 12% annually (driven by disaster-related costs, building cost inflation, and claims frequency)

The gap between income growth and expense growth may be just 1 to 3 percentage points. But compounded over a decade, the cumulative effect transforms the property's financial profile.

10-Year Expense Erosion Model

Consider a property with the following starting characteristics:

• Current market value: $300,000
• Annual gross rent: $24,000
• Property taxes: $4,200 (1.4% of value)
• Insurance: $2,100
• Other operating expenses: $4,800
• Debt service: $7,200 (remaining mortgage: $160,000)
• Starting equity: $140,000
• Starting net cash flow: $5,700
• Starting ROE: 4.1%

Now model 10 years where expenses grow faster than income: rent at 3.5% annually, property taxes at 5.0%, insurance at 7.0%, other expenses at 3.0%, and appreciation at 3.5%.

Notice the paradox: net cash flow increases every year. The property "feels" like it is improving. Monthly deposits grow slightly. But ROE declines every single year, from 4.1% to 3.1%, because your equity is growing (driven by appreciation and mortgage paydown) faster than your cash flow margin can keep up.

The expense ratio tells the deeper story:

The expense ratio climbs from 46.3% to 50.9% over a decade. That 4.6 percentage point shift represents income that is being eaten by expense growth rather than flowing to you. On $32,709 in gross rent, that 4.6% shift equals $1,505 per year in cash flow you would have had if expenses had grown at the same rate as rent.

The Insurance Acceleration Problem

Insurance deserves special attention because its growth rate has accelerated dramatically in recent years. Between 2020 and 2025, homeowner and landlord insurance premiums increased by 30% to 60% nationally, with some states experiencing 80% to 100% increases.

This acceleration changes the picture significantly. Consider the same property but with insurance growing at 10% annually instead of 7%:

At 10% annual growth, insurance alone consumes an additional $1,092 per year by Year 10 compared to the 7% scenario. That $1,092 comes directly out of net cash flow and directly reduces ROE.

For landlords in Florida, Louisiana, Texas, and California, where insurance increases have been most severe, the impact is even more pronounced. Some markets have seen individual property insurance premiums double in three years — an expense shock that can turn a positive-cash-flow property into a break-even or money-losing proposition almost overnight.

The Expense Ratio Trap

The expense ratio trap happens when you fail to recognize that rising expenses are permanently squeezing your margins. The trap has three stages:

Stage 1: Invisible Erosion (Years 1-4). Your expense ratio creeps upward by 0.3 to 0.5 percentage points per year. Cash flow still grows in dollar terms. Nothing feels wrong.

Stage 2: Noticed but Rationalized (Years 5-7). You notice that tax and insurance bills are higher. You tell yourself: "Costs go up everywhere." You adjust rents slightly. The margin continues to shrink.

Stage 3: Permanent Squeeze (Years 8+). The expense ratio has risen 4 to 6 percentage points. Your profit margin has permanently declined. The property's ROE is now well below your target, but inertia and emotional attachment keep you from reevaluating.

When Expense Growth Triggers Reevaluation

Expense growth alone can be a valid trigger for a hold/sell reevaluation. Here are the specific thresholds that should prompt analysis:

1. Expense ratio exceeds 50%. When more than half of gross rent is consumed by operating expenses (excluding debt service), the property's operating efficiency has degraded to a level that warrants serious review.

1. Any single expense grows more than 2x the rate of rent growth for three consecutive years. If rents grow at 3% but property taxes grow at 7% for three straight years, the trend is structural, not a one-time blip.

1. Insurance costs exceed 12% of gross rent. Insurance historically runs 5% to 8% of gross rent for residential properties. When it crosses 12%, the property is in a market with a lasting insurance cost problem that may not self-correct.

1. Expense-driven ROE drops below your minimum threshold. If your minimum ROE threshold is 6% and expense growth is the primary reason ROE is falling below that level, the expenses are not just an annoyance — they are telling you something about where your money should be.

Factoring Expense Growth into Hold/Sell Decisions

When modeling whether to hold or sell a property, most landlords project future rent growth and appreciation. Few project expense growth with equal care. This creates overly optimistic hold projections.

A more accurate hold/sell analysis includes:

• Projected rent growth based on local market data (not national averages)
• Projected property tax growth based on your jurisdiction's reassessment schedule and historical tax rate changes
• Projected insurance growth based on your carrier's trend and the broader market for your region
• Projected maintenance cost growth based on property age and condition

When you model all four expense categories with realistic growth rates, the forward-looking ROE often looks meaningfully worse than your current ROE. That deteriorating trajectory is the signal.

ROE Engine allows you to model expense growth scenarios against your current portfolio, showing you which properties are most at risk of expense-driven ROE erosion before the erosion becomes severe.

The Behavioral Dimension

Expense growth is psychologically easy to ignore because each individual increase is small. A $200 property tax increase does not trigger alarm. A $150 insurance premium increase feels normal. But these small increases compound into a permanent squeeze on your margins that fundamentally changes a property's return profile.

Two behavioral patterns make this particularly dangerous:

Getting used to it. After several years of expense increases, you start to accept it as normal. "Taxes always go up" becomes a conversation-ender that stops you from asking whether the rate of increase is sustainable for your investment.

Focusing on the dollar amount instead of the percentage. You focus on the absolute size of expenses rather than what percentage of your income they consume. A $6,000 tax bill on a $24,000 rent feels different from a $6,000 tax bill on a $32,000 rent, but the trend in that ratio is what actually determines where your margins are heading.

Practical Steps for Expense Management

1. Track your expense ratio quarterly. Total operating expenses divided by gross rent, calculated every 90 days. Plot the trend. If it is rising, understand why.

1. Benchmark against your market. Different property types and markets have different normal expense ratios. A 45% expense ratio might be excellent for one market and concerning for another. Know your baseline.

1. Challenge tax assessments when justified. Property tax appeals have a success rate of 30% to 50% in many jurisdictions. If your assessed value exceeds realistic market value, an appeal is a direct way to fight expense growth.

1. Shop insurance every 18 to 24 months. Insurance markets are cyclical. Carriers that are competitive in one cycle may not be in the next. Regular shopping is the most reliable defense against premium increases.

1. Model forward expense growth in every hold/sell analysis. Never assume flat expenses. Use your own trailing 3-year expense growth rates as the baseline projection. If the forward ROE trajectory is declining, the property deserves reevaluation regardless of current performance.

The properties that quietly erode your returns are rarely the ones with obvious problems. They are the ones where small, persistent expense growth slowly transforms a productive asset into an inefficient one. Seeing this trend requires measurement. Acting on it requires discipline. Both are within your control.