Operational Expense Ratio (OER) Calculator

Operational Expense Ratio (OER) Calculator

Stop guessing your property’s financial health. Calculating the Operational Expense Ratio (OER) isn’t as straightforward as it seems. Many investors overlook important expenses or misclassify costs. This leads to inflated numbers and misguided decisions. Understanding your OER is crucial for evaluating the efficiency of your real estate investments.

How to Use This Calculator

First, gather all your operational expenses. This includes property management fees, maintenance costs, utilities, insurance, and property taxes. You’ll need to know your gross operating income (GOI) as well. This isn’t just about entering numbers; it’s about ensuring those numbers are accurate. Check bank statements, invoices, and your accounting software to pull the right figures. If you’re missing data, your OER will be skewed.

Variables Explained

Let’s break down the inputs. The Gross Operating Income (GOI) represents total revenue generated from the property, excluding vacancy losses. This includes rent and any other income streams. Next, you have Total Operating Expenses. This is where most people falter. It’s not just maintenance and management fees; you need to account for repairs, property taxes, and even administrative costs. Make sure you aren’t leaving out any hidden fees that can eat into your profits.

Case Study

For example, a client in Texas thought they were sitting on a goldmine. They had a rental property pulling in $120,000 a year. However, they were only accounting for management fees and maintenance. When we dug deeper, we found they were overlooking property taxes, insurance, and even landscaping costs. Their true operating expenses were closer to $80,000. After recalculating their OER, they realized their property wasn’t performing as well as they thought. A few adjustments later, they were able to improve their financial position significantly.

The Math

The formula for calculating OER is simple: divide your Total Operating Expenses by your Gross Operating Income, then multiply by 100 to get a percentage. If your total expenses are $80,000 and your GOI is $120,000, your OER would be (80000 / 120000) * 100, which equals 66.67%. This means 66.67% of your income is being spent on operational costs. If your OER is too high, it’s time to reevaluate your expenses.

💡 Industry Pro Tip

Here’s a nugget of wisdom: Always compare your OER to industry benchmarks. Different markets have different standards. If your OER is significantly higher than similar properties in your area, something is off. Dive into those numbers and figure out where you can cut costs or boost income.

FAQ

What is an acceptable OER? An OER below 60% is often considered good, but it varies by market. Know your numbers.

Can I improve my OER? Yes, by reducing unnecessary expenses or increasing your rental income.

What if I have fluctuating income? Use an average of past income figures to get a more accurate OER.

How often should I calculate my OER? At least annually, but quarterly reviews can help you stay on top of your financial health.