What is Operating Expense Ratio?
The Operating Expense Ratio (OER) measures the proportion of a real estate investment property’s gross income that is allocated towards operating expenses.
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How to Calculate Operating Expense Ratio (OER)
The operating expense ratio (OER) is determined by dividing a real estate property’s operating expenses by its gross operating income (GOI).
- Low Operating Expense Ratio → A lower OER indicates the property is run efficiently by management (and vice versa for a higher OER ratio).
- High Operating Expense Ratio → If a property’s OER is higher, a substantial percentage of the property’s income is reduced by its ongoing operating expenses. In effect, the margins on the property investment decline, which causes the returns to the real estate investor to decrease — all else being equal.
The operating expense ratio (OER) can be calculated using the following four-step process.
- Determine the Operating Expenses → The operating expenses of a property include maintenance, repairs, property management fees, utilities, insurance, property taxes, and other costs incurred while running the property.
- Calculate Gross Operating Income (GOI) → The gross operating income (GOI) is the total income that a property generates before expenses. GOI is usually composed primarily of rent payments collected from tenants, but any other sources of income must also be included, e.g. application fees, amenities fees, laundry fees, parking permits, or other on-premise services.
- Divide the Operating Expenses by the Gross Operating Income (GOI) → The output is the operating expense ratio (OER). However, the resulting figure will be in decimal format.
- Convert into Percentage → By multiplying the prior step by 100, the OER is converted into a percentage.
Operating Expense Ratio Formula (OER)
The operating expense ratio (OER) formula is as follows.
Operating Expense Ratio (OER) = Total Operating Expenses ÷ Gross Operating Income (GOI)
Since the OER formula compares an investment property’s operating expenses to its gross operating income (GOI), the ratio shows the percentage of a property’s gross operating income that can “cover” its operating expense burden.
