Rent growth has stalled across most of the country, and that's forcing multifamily operators to rethink where returns actually come from. On this episode of The Real Estate Investing Club, host Gabe Petersen sits down with Sam Morris, partner at Lone Star Capital Real Estate — a firm managing roughly 6,000 multifamily units across Texas — to break down exactly how his team is still growing net operating income (NOI) in a market where rents just aren't cooperating.
Quick Answer: Multifamily investors can grow NOI without raising rents by auditing vendor contracts for overpriced services (trash, courtesy officer, landscaping), bringing outsourced services in-house, and adding ancillary income streams like bulk Wi-Fi and parcel lockers. Every dollar of expense cut or new ancillary income gets capitalized at the property's cap rate, creating outsized value versus the cost to implement it.
Why Rent Growth Isn't Driving NOI Right Now
The quick version: After years of heavy apartment construction, most U.S. markets are still absorbing excess supply, which is keeping asking-rent growth muted through 2026. Operators are prioritizing occupancy over aggressive rent increases, which pushes NOI growth toward the expense side of the ledger instead.
Sam described this shift directly on the podcast:
"A lot of what our focus has been on the last several deals that we've closed has been on expense optimization. And that's where you're seeing a lot of the NOI growth, at least in the first year or two, and/or ancillary income."
This isn't just a Lone Star Capital story — it matches what's happening industry-wide. National vacancy is projected to hold in the mid-8% range through 2026 as the market works through a historic supply wave, per CBRE's 2026 multifamily outlook, and the National Apartment Association's 2026 housing outlook similarly points to rent growth only gradually returning as construction starts taper off. In practice, that means the properties winning right now are the ones being run leaner and smarter — not the ones betting on another rent spike. For a deeper look at how operators are structuring capital and deals around this reality, see our guide on structuring development deals with minimal capital.
How Do You Audit Vendor Contracts for Hidden NOI Gains?
The quick version: Every recurring vendor contract on a property — trash, courtesy officer, landscaping, pest control — is a candidate for renegotiation or in-housing. Comparing what a seller was paying against market rate, or against what your own operations team can do internally, often uncovers tens of thousands of dollars in annual savings on a single asset.
Sam walked through a real example from a 376-unit Houston acquisition his firm closed:
"There was a valet trash contract that they had, and they paid $56,000 a year just for that one contract. Well, that was something that we do typically in-house and we have a porter that's typically at the property... so we were able to just assume that."
That single move eliminated $56,000 in annual expense. The same deal had a courtesy officer contract running roughly $70,000 a year that Lone Star Capital restructured by housing officers on-site at a discounted rent in exchange for their services — again, capturing a meaningful expense delta.
Why does a $56,000 savings matter so much? Because commercial multifamily is valued on its NOI using a cap rate. As Sam put it:
"Anytime you do something like that, it's cap rated out. Right. So if we can immediately just — $56,000 is taken out of the expense and you put a cap rate to that, well, that's immediate value that you're driving to the property itself."
At a 6% cap rate, for example, cutting $56,000 in annual expense adds roughly $933,000 in property value — without touching a single unit's rent. Gabe echoed this from his own portfolio of mobile home parks:
"We just did this with a mobile home park that we're buying and they were paying like double what the standard rate is for trash pickup... if you apply a cap rate to that money, it's an actual sizable amount."
Vendor Contracts Worth Reviewing First
- Valet or bulk trash service
- Courtesy officer / security contracts
- Landscaping and grounds maintenance
- Pest control
- Internet, cable, and bulk Wi-Fi agreements
- Laundry vendor revenue-share terms
If you're earlier in your investing journey and still building out this skill set, our breakdown on transitioning from residential to commercial real estate covers how to start thinking in these operational terms.
What Ancillary Income Opportunities Should You Add?
The quick version: Beyond cutting expenses, operators are generating fresh NOI by adding amenities residents already want to pay for — bulk internet/Wi-Fi, parcel locker systems, and similar convenience fees — layered on top of the base rent roll rather than baked into it.
On the same 376-unit deal, Sam's team identified that the property lacked bulk Wi-Fi:
"From an income perspective, an amenity that we can add, we would bring bulk Wi-Fi to the property. And so the residents would pay for that through an amenity fee... there's other things we would put into that, like we're bringing in a parcel locker station to the property."
The key underwriting nuance here: these income streams don't show up immediately. Sam noted it typically takes about two years to reach full penetration as new residents move in and existing leases turn over, so the underwriting model needs to reflect that ramp-up period rather than assuming day-one income. This kind of ancillary income strategy pairs well with the value-add approach covered in our piece on multifamily development from value-add to ground-up.
How Should You Underwrite a Deal Around Expense Optimization?
The quick version: Build conservative rent growth assumptions into your model, add an expense buffer for the unexpected, and evaluate whether your team can actually execute the operational plan on-site — not just whether the numbers work on paper.
Sam was candid that his firm now underwrites very limited rent growth given current market conditions, instead concentrating projected NOI gains in the expense line:
"I would say when we're doing our underwriting, we're typically underwriting very limited rental growth."
He also emphasized a distinction that's easy to miss: physical value-add (renovating units for higher rent) is producing weaker results in this cycle than operational or financial value-add (fixing the expense structure or the capital stack).
"It's not necessarily going to — we're going to go in there and we're going to spend $15,000 a door rehabbing this property, and then because of that, we're going to get $200 more rent. We're just not seeing that play out in the market overall."
Gabe added a related underwriting principle worth building into any model:
"It's very important to put in a buffer in your underwriting... put in 10%, 5%, whatever it is, buffer on the expenses to make sure that when things do go wrong, you don't experience negative cash flow, at least for too long."
Sam's team also stresses execution risk during underwriting — asking whether the on-site staff can realistically carry out the plan, not just whether it pencils in a spreadsheet:
"Getting the buy-in from the onsite staff that's going to be actually operating it... that's a whole other level in the underwriting where you go, okay, we're now set up for success here."
For investors who want a structured way to build these skills, our real estate mentor guide covers how to find the right guidance for your stage of investing.
How Do You Find Off-Market Multifamily Deals at Scale?
The quick version: At the institutional level, deal flow runs almost entirely through broker relationships rather than direct-to-seller outreach. Consistently closing what you say you'll close earns early access to deals before they're broadly marketed.
For deals in Lone Star Capital's $30–70 million buy box, Sam explained that brokers — not direct seller contact — are the primary deal source:
"Almost all of them come through brokers... when we're looking in that 30 to 70 million dollar range, those are a little bit more sophisticated sellers and they're going to brokers to market their deals."
The payoff for being a reliable closer compounds over time:
"Performing and closing the deal with the brokerage group — when they bring you the next deal, the broker is talking about you to the seller of your ability to perform... it's happened with us where we weren't the high bidder, but we were picked because of our ability to close."
Gabe confirmed this dynamic from his own experience selling assets, noting that sellers will sometimes take a lower offer from a buyer their broker trusts to actually get to the closing table over a higher offer with more execution risk. If broker relationships and off-market sourcing are a gap in your current strategy, see our guide on raising real estate capital without cold calling and our roundup on finding underpriced multifamily deals in 2026.
Should You Start With Small or Large Multifamily Deals?
The quick version: Counterintuitively, larger multifamily deals can be operationally safer than small ones, because they generate enough cash flow to absorb unexpected problems. A single maintenance issue that would wipe out a duplex's cash flow barely registers on a 300-unit property.
When Gabe asked what advice Sam would give his younger self starting out in 2007, the answer was immediate:
"Go bigger than you think. I don't think I would have ever done a deal less than 100 units... it actually is easier the larger the deals are."
Gabe connected this directly to his own experience scaling into self-storage and mobile home parks:
"The smaller deals are actually more dangerous... if you have one issue with that duplex, it is going to wipe out all of your money. Buying big properties insulates you from problems because then you have the cash to deal with the problems as they arise."
If you're currently weighing this exact decision, our guides on the single-family to multifamily transition and scaling multifamily real estate walk through how to make that jump deliberately rather than accidentally.
Why Is Houston a Focus Market for Multifamily Right Now?
The quick version: Houston combines strong population growth, in-migration, and job creation with a supply picture that's starting to tighten — a combination Sam's firm considers rare enough to concentrate its entire portfolio in the state of Texas.
Sam pointed to population and job growth as the deciding factors for Lone Star Capital's market focus:
"When I look at population growth, when I look at job growth, when I look at in-migration growth, foreign migration growth, Houston is still number one."
The data backs this up. Houston led the nation in metro population growth in the most recent 12-month period on record, adding nearly 127,000 new residents, according to the Greater Houston Partnership's Economy at a Glance report. Houston also remains the fourth-largest city in the United States by population. Sam's underwriting approach reflects a broader principle worth applying to any market:
"I will absolutely go acquire a C-class deal in an A-class location. I won't acquire an A-class deal in a C-class location."
For more on evaluating markets through this lens, check out our piece on building a recession-resilient real estate portfolio.
Key Takeaways for Multifamily Investors
- Expense optimization, not rent growth, is driving NOI gains in 2026. Audit every vendor contract against market rate before assuming rent is your only lever.
- Cap rate math makes expense cuts disproportionately valuable. A relatively small annual savings can translate into a large jump in property value.
- Ancillary income (bulk Wi-Fi, parcel lockers) takes time to ramp. Build a realistic penetration timeline into your underwriting, not day-one income.
- Underwrite conservative rent growth and build in an expense buffer. Assume something will go wrong, because on a long enough timeline, something always does.
- Broker relationships are the deal-flow engine at scale. Consistently closing what you commit to is what earns early access to the next deal.
- Bigger deals can be operationally safer than small ones, because they carry enough cash flow to absorb the unexpected.
- Location quality often outweighs asset class quality. A C-class deal in an A-class location tends to outperform the reverse.
Frequently Asked Questions
What is expense optimization in multifamily real estate? Expense optimization means reviewing and renegotiating every recurring cost on a property — vendor contracts, staffing, service agreements — to bring them to market rate or bring them in-house, directly increasing NOI without touching rents.
How much can cutting a vendor contract actually increase property value? Because commercial real estate is valued using a cap rate, every dollar of annual expense removed is capitalized into value. At a 6% cap rate, a $56,000 annual expense cut adds roughly $933,000 in property value.
Is it better to buy a small multifamily property or a large one as a first deal? Larger properties generate more cash flow relative to their fixed costs, which helps absorb unexpected expenses. Sam Morris and Gabe Petersen both noted that small deals can be riskier because a single issue can wipe out thin cash flow.
How do institutional multifamily buyers typically find deals? At scale (roughly $30 million and up), most deals are sourced through broker relationships rather than direct-to-seller marketing, since sophisticated sellers in that range list through brokerage groups.
Want to learn more about the REI Club Podcast? Click here.
Want to grow your business with ads? Join our sister company here: Kaizen Marketing Agency.
Want to invest in Gabe's next deal? Click here.
Want to join our community of active investors? Click here.
