Operating Expense Ratio - OER
A measure of what it costs to operate a piece of property compared to the income that the property brings in. The operating expense ratio is calculated by dividing a property's operating expense by its gross operating income. Investors using the ratio can further compare each type of expense, such as utilities, insurance, taxes and maintenance, to the gross operating income, as well as the sum of all expenses to the gross operating income.
The operating expense ratio is a useful tool when comparing the expenses of similar properties. If a particular piece of property has a much higher OER for a particular expense, such as maintenance, an investor should see that as a red flag and should look deeper into why maintenance expenses are so much higher than comparable properties.
For example, consider a piece of property with a gross operating income of $50,000. Total operating expenses are $6,200, which include utilities ($700), insurance ($1,500) and taxes ($4,000). The overall OER would be 12.4% ($6,200/$50,000) and the broken down OER for each of the expenses would be 1.4% for utilities ($700/$50,000), 3% for insurance ($1,500/$50,000), and 8% for taxes ($4,000/$50,000). The investor can then compare these percentages to other similar properties.
Investment dictionary. Academic. 2012.
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