What is an operating expense ratio?
What is an Operating Expense Ratio?
The Operating Expense Ratio (also known as the OER or "opex ratio") in multifamily real estate is a financial metric used to understand the efficiency of a property’s operation. It is calculated by dividing the total operating expenses of a property by its gross operating income. Below is a breakdown of its components and significance.
Operating Expenses
These include all costs associated with running and maintaining the multifamily property. Common expenses include property management fees, maintenance costs, utilities, property taxes, insurance, and repairs. It does not include mortgage payments or capital expenditures (major renovations or upgrades).
Gross Operating Income
This is the total income generated by the property, primarily through rent. It might also include other income sources like laundry facilities, parking fees, or service charges. It's important to note that this is the income before any expenses are deducted.
How to Calculate an Operating Expense Ratio
The formula is:
Operating Expense Ratio = Total Operating Expenses / Gross Operating Income
This ratio is typically expressed as a percentage.
How to Use the Opex Ratio
The Operating Expense Ratio is a key metric in multifamily real estate, helping investors and managers understand the proportion of income consumed by operating expenses, and thus the efficiency and profitability of property operations.
A higher opex ratio suggests that a property is more expensive to operate, which could be due to higher maintenance costs, inefficient management, or other factors leading to higher expenses.
A lower opex ratio indicates a more efficiently run property with lower operating costs in relation to its income.
The 'normal' OER can vary widely depending on the market, the type of property, and its age. Newer properties might have lower OER due to fewer maintenance needs, while older properties might have higher OER.
For Benchmarking and Analysis: Investors and property managers use the OER to compare properties and assess their performance. A property with a significantly higher OER than similar properties in the area might be less profitable or in need of operational improvements.
As a Decision-Making Tool: OER is a crucial metric for investment decisions. Investors might seek properties with lower OERs for higher profitability, or they might identify properties with higher OERs as opportunities for improvement and value-add investments.
Automatically Calculating Operating Expense Ratios
HelloData uses AI and machine learning to analyze millions of rental listings across the U.S. every day, which helps us automatically determine the income side of the equation. We've also built a series of algorithms to benchmark multifamily operating expenses (based on data from over 25,000 expense comps nationwide, which provides the expense side of the equation. Because of this, we provide estimates of the income, expenses and opex ratios for millions of properties with only an address. Learn more at: https://www.hellodata.ai/