The operating expense ratio is total operating expenses divided by effective gross income, expressed as a percentage. It says how much of every collected dollar the building consumes before debt, and it is the fastest test of whether a seller's expense schedule describes a real building.
Operating expense ratio=Operating expensesEffective gross income
- Operating expenses
- Taxes, insurance, utilities, management, repairs and turnover. Not debt service, not income tax, not capital projects.
- Effective gross income
- Gross potential rent less vacancy and credit loss, plus other collected income.
- It is a comparison tool only between buildings of similar age, size and structure. A ratio quoted without that context is decoration.
- It moves when income moves, not only when expenses do, so a rent increase improves the ratio without a single expense being cut.
- Missing lines are the tell: no management fee, no reserves, no turnover cost. Owner-operated buildings hide labour that a buyer must pay for.
- In Florida, rebuild it on the buyer's tax bill and a current insurance quote before comparing it to anything.
The same eight units, on the building's own numbers.
Forty-six cents of every collected dollar never reaches the owner. A package showing thirty for the same building is describing a different one.
Related terms
All termsNOI (Net Operating Income)
Net operating income is what a property earns from operations in a year: all collected income minus operating expenses, before any mortgage payment, income tax, or capital projects.
InvestmentProforma
A proforma is the projected income and expense statement for a property: what the next owner is being asked to believe.
InvestmentCap Rate (Capitalization Rate)
The capitalization rate is a building's net operating income divided by its price, expressed as a percentage.
Terms arrive with the writing.
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