Operating Expense Ratio

Operating Expense Ratio can be explained as a way of quantifying the cost of operating a piece of property, such as an apartment building or commercial real estate, versus the income brought in by that property.

Operating Expense Ratio

Operating Expense Ratio can be explained as a way of quantifying the cost of operating a piece of property, such as an apartment building or commercial real estate, versus the income brought in by that property.

 

Operating Expense Ratio Formula

The main items included in the operating expense ratio formula include property management, property taxes, utilities, wages, insurance, fees, supplies, repairs and maintenance, advertising, accounting fees, attorney fees, pest control, trash removal, and similar more. 



The items not included in operating expenses are personal property, loan payments, and capital improvements.

Operating Expense Ratio Interpretation

The Operating Expense Ratio is used to carry out comparisons between  analogous properties. If a particular property piece has a high Operating Expense Ratio then an investor should take it as a warning signal and look into the situation further. The investors using this ratio can break down the expenses further and compare any type of expense including insurance, utilities, taxes and maintenance, to the gross income.



The importance of Operating Expense Ratio lies in it being a measure of management efficiency and is also helpful in identifying potential problems. A lower operating expense ratio indicates a greater profit for the investors.


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