In one sentence
Operating expenses as a percentage of effective gross income, a quick gauge of a property's cost efficiency.
The longer version
The expense ratio benchmarks how much of a property's income goes to running it. Ratios far from market norms invite questions: too low may mean deferred maintenance, too high may mean mismanagement.
Lenders compare the ratio to comparable properties as a sanity check on the expense assumptions underlying NOI.
Common questions
- How is the operating expense ratio calculated?
- Divide operating expenses by effective gross income. Expenses of $400,000 against $1,000,000 of EGI is a 40 percent ratio.
- What does the operating expense ratio tell a lender?
- How much of the income goes to running the property. An unusually low ratio can signal understated expenses.
- Is a lower operating expense ratio always better?
- Not necessarily. It varies by property type and lease structure, and a ratio far below comparable properties may mean deferred maintenance or missing costs.
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