What Is Operating Expense Ratio (OER) in Real Estate?

The Operating Expense Ratio (OER) measures how much of a property's income is used to cover operating expenses. Investors use OER to evaluate efficiency and compare rental properties. A lower OER generally indicates stronger cash flow performance.

How Operating Expense Ratio (OER) Works

OER shows what percentage of a property's gross operating income goes toward operating expenses such as repairs, maintenance, management, insurance, and utilities.

Formula:

OER = Operating Expenses ÷ Effective Gross Income

  • Does not include mortgage payments or capital expenditures.
  • Helps investors compare the efficiency of multiple properties.
  • A high OER suggests expenses are consuming too much income.
  • A low OER indicates healthier operating performance.

Example of OER in Real Estate

A rental property generates $60,000 in effective gross income per year. Operating expenses total $24,000.

Using the formula:

OER = $24,000 ÷ $60,000 = 0.40 (40%)

This means 40% of the property's income is used to operate the property, leaving the remaining 60% to contribute to cash flow.

OER vs. NOI vs. Cap Rate

  • OER – Measures expense efficiency relative to income.
  • NOI – Net income after expenses.
  • Cap Rate – Return based on NOI and property price.

OER focuses on expenses, while NOI and cap rate focus on income and investment performance.

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