What is OER? (Definition + formula)
Operating Expense Ratio (OER) measures how much of your property’s income goes toward operating expenses. It’s expressed as a percentage and calculated by dividing total operating expenses by effective gross income.
Formula:
OER = (Total Operating Expenses ÷ Effective Gross Income) × 100
For example, if a property generates $500,000 in effective gross income and incurs $200,000 in operating expenses, the OER is 40%. That means 40 cents of every revenue dollar goes toward keeping the property running, leaving 60 cents for net operating income (NOI).
Investors and asset managers track OER to gauge operational efficiency over time and benchmark performance against comparable properties.
What counts as operating expenses (and what doesn’t)
Operating expenses include the recurring costs needed to run and maintain the property: property taxes, insurance, utilities, repairs and maintenance, landscaping, trash removal, property management fees, payroll for on-site staff, marketing, and administrative costs.
What’s excluded: capital expenditures (CapEx), such as roof replacements or HVAC system overhauls; mortgage payments and debt service; depreciation; and amortization. These items affect cash flow and tax returns but don’t belong in the OER calculation.
The distinction matters because mixing CapEx with OpEx will inflate your ratio and distort comparisons with peers or historical performance.
How to calculate OER step-by-step (with a quick example)
Start by collecting your trailing-twelve-month (T12) operating statement. Add up all operating expenses for the period—property taxes, insurance, utilities, repairs, management fees, and so on.
Next, determine effective gross income (EGI): gross potential rent, minus vacancy and credit loss, plus any other income like laundry, parking, or pet fees.
Divide total operating expenses by EGI, then multiply by 100 to express the result as a percentage.
Example:
A 50-unit multifamily property has $600,000 in gross potential rent. Vacancy and credit loss total $30,000, so EGI is $570,000. Operating expenses for the year are $228,000.
OER = ($228,000 ÷ $570,000) × 100 = 40%
This tells you that 40% of income goes to operating costs, leaving 60% for NOI before debt service or capital improvements.
How to interpret OER: what it signals about operational efficiency and risk
A rising OER over consecutive quarters often signals cost pressures—property taxes increasing faster than rents, maintenance backlogs becoming urgent repairs, or utility rate hikes without tenant recoveries.
A stable or declining OER usually reflects well-controlled expenses, effective property management, or rent growth outpacing cost inflation.
However, context matters. A very low OER can sometimes indicate deferred maintenance, underinsurance, or minimal staffing—short-term savings that may create tenant turnover or surprise capital expenses later.
Lenders and equity partners watch OER trends closely because persistently high or climbing ratios compress NOI margins and reduce debt-service coverage, raising refinance and exit risk.
OER benchmarks and ranges by property type
Typical OER ranges vary widely by asset class, age, and amenity level. Multifamily properties often run between 35% and 50%, depending on whether they’re garden-style value-add assets or newer Class A communities with extensive amenities.
Office buildings can range from 25% to 45%, influenced by whether tenants pay directly for utilities and janitorial or the landlord absorbs those costs under gross leases.
Retail centers—especially triple-net (NNN) assets—may show OERs below 20% when most expenses are passed through to tenants, while gross-leased neighborhood centers can reach 40% or higher.
Industrial and warehouse properties typically exhibit lower OERs, often 15% to 30%, due to simpler building systems, lower staffing needs, and fewer amenities.
Multifamily vs. office vs. retail vs. industrial considerations
Multifamily assets tend to carry higher operating intensity: on-site staff, common-area utilities, landscaping, pool and fitness maintenance, and frequent unit turns drive costs up. Expense recoveries are limited, so landlords absorb most operating costs.
Office properties vary by lease structure. Full-service gross leases push more expense burden onto the landlord, raising OER, while modified-gross or NNN leases shift utilities, janitorial, and sometimes taxes to tenants, compressing the ratio.
Retail OER depends heavily on lease type. NNN structures recover nearly all operating expenses, so the landlord’s net expense footprint is small. Gross or modified-gross formats increase OER because the landlord pays property taxes, insurance, and common-area maintenance directly.
Industrial buildings benefit from straightforward construction, minimal HVAC and plumbing complexity, and fewer amenities, resulting in lower absolute operating costs and lower OER even when rents are modest.
How to improve OER without hurting NOI
Improving OER means reducing the percentage of income consumed by operating expenses. You can attack this from two sides: cutting costs or growing revenue faster than expenses rise.
The best operators focus on strategic expense control—renegotiating insurance and tax appeals, upgrading to energy-efficient HVAC and LED lighting, implementing preventive maintenance schedules to avoid emergency repairs, and consolidating vendor contracts for volume pricing.
Revenue optimization can be equally powerful. Raising rents in line with market conditions, adding ancillary income streams (storage, pet fees, parking), and minimizing vacancy through better tenant retention all expand the denominator in the OER formula, which lowers the ratio even if absolute expenses hold steady or grow modestly.
Timing matters: slashing maintenance or understaffing to hit an OER target may improve the metric short-term but damage tenant satisfaction, increase turnover, and trigger deferred-maintenance bills that hurt NOI and asset value over the hold period.
Expense reduction vs. revenue optimization (and when each works)
Expense reduction delivers immediate impact when costs are bloated, contracts haven’t been rebid in years, or utility consumption is excessive due to outdated systems. It’s especially effective in stabilized assets where occupancy is already strong and rent growth is limited by market caps.
Revenue optimization shines in under-managed properties with below-market rents, high turnover, or untapped ancillary income. Raising in-place rents 5% and capturing $50 per unit per month in new fees can lower OER by several percentage points without touching the expense line.
In practice, the strongest plays combine both. A value-add repositioning might upgrade units to justify rent premiums (revenue up) while installing submetering and smart thermostats to cut utility costs (expenses down), compressing OER from both directions and maximizing NOI lift.
Common pitfalls in OER analysis (recoveries, utilities, CapEx vs. OpEx, one-time items)
One frequent mistake is failing to account for expense recoveries. If tenants reimburse you for a portion of taxes, insurance, or CAM, your net operating expense is lower than the gross line item. Comparing gross expenses across properties with different recovery structures will distort the picture.
Utility treatment varies by lease type and submetering infrastructure. In some properties, utilities appear as landlord operating expenses; in others, tenants pay directly and the cost never touches the operating statement. Apples-to-apples comparisons require normalizing utility responsibility.
Misclassifying CapEx as OpEx inflates OER and makes the property look less efficient than it is. A $30,000 roof patch is OpEx; a $200,000 roof replacement is CapEx. Drawing that line consistently matters for trend analysis and peer benchmarking.
One-time items—such as a special assessment, legal settlement, or storm cleanup—can spike OER in a single period. Analysts typically adjust these out or use trailing averages to smooth volatility and see the underlying operating performance.
OER vs. related metrics (expense ratio, NOI margin, cap rate) and when to use each
OER is one member of a family of efficiency and return metrics. “Expense ratio” is often used interchangeably with OER in real estate, though in other asset classes it can refer to fund management fees.
NOI margin flips the perspective: it divides NOI by effective gross income, showing how much income remains after operating expenses. If OER is 40%, NOI margin is 60%. Both tell the same story from different angles; NOI margin is common in corporate real estate and REIT reporting, while OER is popular in acquisitions and asset management.
Cap rate (NOI ÷ property value) measures yield and pricing, not operating efficiency. A property can have a great OER but a low cap rate if it’s in a hot market where buyers accept compressed yields. Conversely, a high cap rate with a poor OER signals underperformance that might justify a value-add strategy.
Use OER to diagnose and track operating efficiency. Use NOI margin when presenting to equity partners focused on profit retention. Use cap rate to evaluate pricing, compare markets, and underwrite acquisitions.
FAQ
What does OER mean in real estate?
In property operations, OER typically stands for Operating Expense Ratio: operating expenses divided by effective gross income (often expressed as a percentage).
What is a “good” OER for a rental property?
It depends on property type, age, market, and utilities/amenities. Compare against peers in your submarket and track your own trend over time; a “good” OER is one that supports stable service levels while improving NOI.
What expenses are included in Operating Expense Ratio?
Commonly included: property taxes, insurance, utilities, repairs & maintenance, payroll/contract labor, management fees, trash/landscaping, and admin/marketing. Capital expenditures (CapEx), depreciation, and financing costs are typically excluded.
Should vacancy be included in the OER calculation?
OER usually uses effective gross income (after vacancy and credit loss). Using gross potential rent can understate OER when occupancy is soft.
How do NNN vs gross leases affect OER?
In NNN structures, many expenses are recovered from tenants, which can lower the owner’s net operating expense burden (and OER). In gross leases, the landlord absorbs more expenses, often increasing OER.
Is property management fee included in OER?
Yes, ongoing management fees are typically treated as operating expenses and included in OER.
How do you compare OER across properties fairly?
Standardize assumptions (expense categories, recovery accounting, utility responsibility), use trailing 12-months where possible, and segment by property type, vintage, and service level (amenities, staffing model).
How is OER different from an expense ratio or NOI margin?
OER is a type of expense ratio focused on operating expenses relative to income. NOI margin focuses on NOI relative to income; improving OER generally improves NOI margin, but revenue changes can move both.
Can a lower OER ever be a red flag?
Yes—if it’s driven by deferred maintenance, underinsurance, or under-reserving for replacement, it may signal future CapEx spikes or tenant retention risk.
Does OER also mean something else outside real estate?
Yes. In other contexts, “OER” can mean Open Educational Resources (education) or refer to certain brands. For leasing and property operations, it most often refers to Operating Expense Ratio.
