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The Operating Expense Ratio (OER) is the ratio between the total operating expenses and the effective gross income.
Operating expenses are costs associated with the operation and maintenance of income producing properties. They include such items as property taxes, property management fees, insurance, wages, utilities, repairs and maintenance, supplies, advertising, attorney fees, accounting fees, trash removal, pest control, etc.
The following are not operating expenses: loan payments, personal property and capital improvements.
The effective gross income for a property is the actual yearly income from all sources. It is equal to the yearly gross rents possible plus other income such as laundry receipts, vending machines, parking fees, etc. less the yearly vacancy amount.
The operating expense ratio shows the percentage of a property's income that is being used to pay maintenance and operational expenses.
Operating Expense Ratio = Operating Expenses/Effective Gross Income
To establish a benchmark OER, you would calculate the operating expense ratio of similar income properties. You would then calculate the average OER for the properties.
The operating expense ratio is an indicator of how efficiently a property is being managed. The lower the operating expense ratio, the greater the profit for the investors.
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Determine the Real Estate Financial Statistics for a PropertyBefore you buy an investment property it is critical that you create your own projection of the property's profitability. Real-Estate-Proforma.com has a quick-proforma with which you can calculate real estate financial statistics such as Internal Rate of Return, Capitalization Rate, Cash-on-Cash, Debt Multiplier, Loan-to -Value Ratio, Debt Coverage Ratio, and Mortgage Payments. You can use this JavaScript proforma to project the profitability of a real estate project. By becoming a member you will receive access to a number of Excel real estate proformas. membership | services
If you are analyzing another person's proforma, or you are examining a prospectus for a real estate deal, it is very important that you read the document carefully and determine how the values of the financial statistics above are being calculated. For instance, values such as the Cap Rate may be determined from overly optimistic projections of the future rental income of a property.
You can "reverse engineer" the financial projections you receive from a prospectus and/or request the Excel (or other type of) spreadsheet a developer used to create their proforma. A very useful Excel or Visual Basic macro used to check Excel formulas is available in the spreadsheet below for download. Download Mortgage Formula Excel Spreadsheet
The due-diligence you do on a potential investment may uncover a number of potential problems with a real estate deal and we suggest you research each real estate investment very carefully. There are a variety of real estate financial consultants who can help with this, but if you are like many Real-Estate-Proforma.com members, you can or are learning to do your own due-diligence.
We hope you become a more successful real estate investor by using this site! membership | services