How to Figure Operating Expense Ratio
An operating expense ratio measures an investment property’s total operating expenses as a percentage of its potential gross income. Operating expenses are the costs an investment property owner pays to maintain and manage the property. Potential gross income is the total income the property would generate if it were fully occupied with tenants. A lower operating expense ratio means a property has lower operating expenses compared to income, which leads to higher net operating income, or profit. This can increase a property’s value.
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Instructions
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Determine the amounts of an investment property’s annual operating expenses, such as utilities, administrative, property taxes, landscaping and trash expenses. For example, assume a property has $10,000 in property taxes, $1,000 in utilities, $5,000 in administrative, $500 in landscaping and $500 in trash expenses.
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Add together the amounts of the property’s operating expenses to calculate total operating expenses. In this example, add $10,000, $1,000, $5,000, $500 and $500 to get $17,000 in total operating expenses.
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Determine the number of square feet of the property and the annual rental rate per square foot. In this example, assume that the property is 5,000 square feet and that it rents for $10 per square foot annually.
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Multiply the number of square feet by the annual rental rate to calculate the property’s potential gross income. In this example, multiply 5,000 by $10 to get $50,000 in potential gross income.
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Divide total operating expenses by potential gross income. Then multiply your result by 100 to figure the property’s operating expense ratio. In this example, divide $17,000 by $50,000 to get 0.34. Multiply 0.34 by 100 to get a 34 percent operating expense ratio. This means that the property owner spends 34 percent of the potential gross income on operating expenses.
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References
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