Operating Expense Ratio (OER)
Also called: OER, Expense ratio
The operating expense ratio is total operating expenses divided by effective gross income, expressed as a percentage, and it measures what share of collected revenue is consumed by running the property.
OER is the fastest sanity check available on an income statement. Multifamily operating expense ratios generally fall between 35% and 55% of effective gross income, varying with property age, market, tax burden, and whether utilities are billed back to residents.
A ratio far below that band almost always signals an incomplete expense load rather than exceptional management. The usual culprits are a missing management fee, no replacement reserve, property taxes stated at the seller's assessed value instead of the reassessed value, and insurance quoted at an expiring rather than current premium.
How to calculate operating expense ratio
OER = Operating Expenses / Effective Gross IncomeRules of thumb
- An OER under 30% on a conventional multifamily deal is a red flag, not a find. Rebuild the expense load line by line.
- Compare per-unit expense figures alongside the ratio. Expenses per unit per year normalize better across properties of different rent levels.
Calculate operating expense ratio
Related terms
- Effective Gross Income (EGI)
Effective gross income is gross potential rent less vacancy, concessions, and credit loss, plus other income such as parking, pet fees, and utility reimbursements.
- Net Operating Income (NOI)
Net operating income is a property's effective gross income minus all operating expenses, excluding debt service, capital expenditures, depreciation, and income taxes.
- Replacement Reserves
Replacement reserves are an annual per-unit allowance set aside for the periodic replacement of major building components such as roofs, HVAC systems, and appliances, deducted as an operating expense by most lenders.