Operating Expense Ratio
Candlefocus EditorThe OER is calculated by dividing the total operating expenses (minus depreciation) by the operating income. This calculation gives a percentage that reveals how efficiently a property’s expenses are being managed relative to the amount of income it generates.
For example, if the total operating expenses were $100,000 and the operating income was $250,000, then the OER would be 40%, meaning that for every $1 of income generated, $0.40 is spent on operating expenses. Generally, it is more desirable for investors to have a lower OER since it indicates that expenses are being minimized and the property is generating a better return on income.
In order to measure the OER of a property, investors need to consider a variety of factors, such as the maintenance, repairs, property taxes, insurance, utilities, and the presence or absence of a tenant. Investing in a property with a lower OER than similar investments in the same area may be an indication that the property is either under-managed, or is a better investment in general.
It is important to note that while OER is a good indication of a property’s performance, it is not always a reliable indicator as it can be affected by external factors and market conditions. That said, the OER is a valuable metric to consider when evaluating a potential real estate investment because it can provide insight into the efficiency and profitability of the property.