Expense ratio

Expense ratio

What is Expense ratio?

The Expense Ratio is an operating metric that helps landlords and property investors understand how efficient the property is running. Understanding the expense ratio helps landlords know if the property is a good investment and/or if there are opportunities to improve the margin. You can take all of the cash operating expenses for the property and divide it by the actual gross income for the property (less vacancies).

This ratio is important for many stakeholders:

  • Lenders can understand if the property is risky to lend against
  • Property Managers can understand if there are opportunities to increase revenues or decrease expenses
  • Property investors can understand if the property is worthwhile to hold within a portfolio relative to other available opportunities on the market

A good expense ratio is a number between 30% to 45%. Depending on the locale, investment strategy, and property type, expense ratios can vary.

How do I calculate the Expense Ratio?

\[ { Total \, operating \, expenses \over { Annual \, gross \, income - Rental \, vacancy } } = Expense \, Ratio \]

Expense Ratio example

If total expenses incurred by a property are $7,500 in a year and the same property brings in an annual income of $10,000, the expense ratio will be $7,500/$10,000. A lower expense ratio is ideal.

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