What Is the Operating Expense Ratio?

Answer

The operating expense ratio is a property’s operating expenses divided by its effective gross income, shown as a percent. If a property collects $1,000,000 and spends $450,000 to operate, its expense ratio is 45%. Lower ratios mean more income converts to NOI.

Expense ratios vary by property age, class, and market, but an unusually low ratio in a pro forma can be a red flag that expenses are understated. Tightening operations to a sustainable expense ratio is core to a value-add plan.

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