what is a good expense ratio for a rental property?

An investor should look for red flags, such as maintenance costs, operating income or higher utilities, that may dissuade them from buying a particular property. The ideal operating ratio is between 60-80% (although the lower the better).

what is a good expense ratio for a rental property?

An investor should look for red flags, such as maintenance costs, operating income or higher utilities, that may dissuade them from buying a particular property. The ideal operating ratio is between 60-80% (although the lower the better). For apartment buildings, a good operating ratio is usually between 35 and 45%. However, it is important to compare properties on a local level, as costs can vary between municipalities.

Total - Between 37 and 48% of the rent will go towards operating costs. To be conservative, this can be rounded up to 50%. If you do not plan to manage the property yourself, you will need a property manager who will have their own fees. In the case of short-term rentals, this can be between 10 and 40 per cent of your gross income.

The Operating Expense Ratio (OER) is the ratio of the total operating expenses to the actual gross income of the property. Operating expenses are the costs associated with operating and maintaining the property. Typical property expenses include items such as property taxes, insurance, pest control, utilities, repairs and maintenance, supplies, advertising, attorney's fees, accounting fees, and lawn maintenance. Much depends on the property and the neighbourhood.

However, lenders want to see a maximum OER of 40 to 45%. In the case of multi-family dwellings, an OER of less than 40s is good, but make sure that the figure is not misrepresented. A good rule of thumb for a novice underwriter is an expense ratio of 50%. This could be your starting point.

The 50/50 rule is a simple assumption that 50 per cent of your rental income will go to operating expenses. The operating expense ratio shows that 46.39% of the property's income goes to rental operating expenses. When people do a pro-forma, or an estimate of the projected finances of a real estate deal, the operating expenses are usually 35 to 80 e of the gross operating income (GOI), depending on the type of rental property. Unless you already own several multifamily properties, assessing the operating expenses of a new property can be daunting.

Knowing the operating expenses seems easy, but hidden expenses often put rental property owners in a bind. Property taxes There is a lot of risk with tax underwriting, as it tends to be one of the biggest expenses, and there can be a big exposure if you are paying well above current assessment levels. To achieve a positive cash flow on your rental property, you must know your income and expenses. To calculate your cash flow, you must take the income from your property and subtract the total expenses (operating and non-operating).

On the other hand, it could mean a higher vacancy rate or higher credit costs that are depressing rental income. Over time there will be some additional maintenance costs: floors wear out, walls need to be painted, etc. Therefore, items such as (non-cash) depreciation, capital expenditure and tenant improvement allowances are excluded from the ratio because they are not costs that help manage the property. When investing in a rental property, there are three clear signs that it is a good investment to be aware of.

The operating expense ratio, or "OER ," is a simple formula that is easy to calculate and reveals how efficiently a property operates on a day-to-day basis. When calculating the costs of a potential rental property, remember to add in mortgage payments, so you won't be surprised.

Courtney Thomson
Courtney Thomson

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