What is operating expense ratio for a property?
Operating expense ratio is operating expenses divided by effective gross income, multiplied by 100. It shows what share of income is consumed by running the property, before financing and tax.
It matters because two properties with similar rent can have very different profitability if one costs more to run.
Commonly misread:
- Comparing buildings of different types, such as multi-tenant and single-tenant leases where tenants pay their own costs.
- Leaving out management fees or including capital spending.
- Looking at a single year when major repairs fall unevenly.
Break the ratio into categories such as rates, utilities, insurance, maintenance and management to see which line is changing, and track each property against its own history.
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