What is an operating expense ratio and why is it important to understand it?

The operating expense ratio is a figure that represents the percentage of a property's income that is spent on operating expenses.

A high operating expense ratio indicates that a greater portion of the income from the property is being spent on operating expenses, which leaves less money available for other purposes such as debt service, capital improvements and ultimately profit.

Because the operating expense ratio can have such a significant impact on profitability, it is crucial for multifamily property owners and investors to understand how to calculate it and what factors can affect it.

How do you calculate the operating expense ratio of a multifamily property?

The operating expense ratio (OER) of a multifamily property is a measure of how much it costs to operate the property relative to its income. To calculate the OER, divide the total operating expenses by the total income from rent. The resulting number will be expressed as a percentage.

For example, if a property has operating expenses of $100,000 and income from rent of $200,000, its OER would be 50%. Generally speaking, a lower OER is better, as it indicates that the property is more efficient and profitable.

However, with rising operating and energy costs - OER has been negatively impacted for multifamily owners in a way that’s relatively out of their control.

Combine long-term and short-term rentals

Multifamily investors looking to offset their operating expense ratio (OER) can do so by offering both long and short-term rentals within their buildings.

By renting out apartments on a flexible stay basis, investors can take advantage of higher rental rates and generate more income. By using a combination of long and short-term rentals, investors can maximize their profits while offsetting their OER.

One of our multifamily clients achieved the below, increasing apartment revenue by 85%:

What are some factors that can affect the operating expense ratio of multifamily property?

The operating expense ratio (OER) is a key metric for multifamily properties, as it can impact both profitability and cash flow. There are a number of factors that can affect the OER, including the type and age of the property, the local market conditions, and the property's amenities and services. In addition, the OER can be affected by the management company's policies and procedures.

For example, a company that employs best practices in energy efficiency will typically have a lower OER than one that does not. By understanding the factors that influence the OER, investors can make more informed decisions about which multifamily properties to purchase. Ultimately, the decision of what is considered an acceptable OER should be made on a case-by-case basis.

If you want to learn more about how to offset your operating expense ratio and maximize your net operating income, please don’t hesitate to get in touch with us.