Operating Expense Ratio Calculator: Rental Property

What does an OER of 0.40 mean?

On the defaults — $120,000 of operating expenses and $300,000 of effective gross income — the operating expense ratio is 0.40, which means 40.00% of the income goes on operating expenses. The effective gross income is the gross potential rent minus vacancy and credit losses — the rent you actually expect to collect, not the rent on paper. The OER is the operating expenses divided by that income: $120,000.00 ÷ $300,000.00 = 0.40. An OER of 0.40 means forty cents of every dollar of income goes on running the property; an OER of 1.00 means the expenses eat the whole income; an OER above 1.00 means the property loses money before the mortgage is even paid.

Three things about the model are worth stating plainly.

First, the division is $120,000.00 ÷ $300,000.00 = 0.40. Second, the meaning is forty cents of operating expenses per dollar of effective gross income — the cost of running the property, not the profit on it. And third, the OER is displayed to two decimals, half-up, and an OER that displays as 0.40 can sit a hair below the displayed figure: $119,999.50 of operating expenses and $299,999.75 of effective gross income gives 0.399999, which displays as 0.40 — all listed in Accuracy & limitations.

The worked example, line by line

Setup: operating expenses $120,000, effective gross income $300,000.

Line 1 — the effective gross income. The gross potential rent minus vacancy and credit losses is the effective gross income: $300,000.

Line 2 — the OER. $120,000.00 ÷ $300,000.00 = 0.40.

Line 3 — the check. At $150,000 of operating expenses the OER is 0.50; and at $149,999 it is 0.499997 — below 0.50.

Every branch, checked

Operating expenses $150,000: operating expenses $150,000.00; effective gross income $300,000.00; OER 0.50 — With $150,000 of operating expenses the OER rises to 0.50.

Operating expenses $90,000: operating expenses $90,000.00; effective gross income $300,000.00; OER 0.30 — With $90,000 of operating expenses the OER falls to 0.30.

Effective gross income $400,000: operating expenses $120,000.00; effective gross income $400,000.00; OER 0.30 — With $400,000 of effective gross income the OER falls to 0.30.

Effective gross income $240,000: operating expenses $120,000.00; effective gross income $240,000.00; OER 0.50 — With $240,000 of effective gross income the OER rises to 0.50.

Operating expenses $180,000: operating expenses $180,000.00; effective gross income $300,000.00; OER 0.60 — With $180,000 of operating expenses the OER rises to 0.60.

Effective gross income $200,000: operating expenses $120,000.00; effective gross income $200,000.00; OER 0.60 — With $200,000 of effective gross income the OER rises to 0.60.

Operating expenses $60,000: operating expenses $60,000.00; effective gross income $300,000.00; OER 0.20 — With $60,000 of operating expenses the OER falls to 0.20.

Effective gross income $600,000: operating expenses $120,000.00; effective gross income $600,000.00; OER 0.20 — With $600,000 of effective gross income the OER falls to 0.20.

The reverses, worked backwards

Smallest operating expenses for the OER to REACH 0.50: At the displayed $150,000 the figures are operating expenses $150,000.00; effective gross income $300,000.00; OER 0.50 (unrounded 0.500000). At $149,999 the OER is 0.499997 unrounded — below the target, though it displays as 0.50 — so $150,000 is the smallest operating expenses for the OER to REACH 0.50.

Largest effective gross income for the OER to STAY at or above 0.50: At the displayed $240,000 the figures are operating expenses $120,000.00; effective gross income $240,000.00; OER 0.50 (unrounded 0.500000). At $240,001 the OER is 0.499998 unrounded — below the target, though it displays as 0.50 — so $240,000 is the largest effective gross income for the OER to STAY at or above 0.50.

Smallest operating expenses for the OER to REACH 0.75: At the displayed $225,000 the figures are operating expenses $225,000.00; effective gross income $300,000.00; OER 0.75 (unrounded 0.750000). At $224,999 the OER is 0.749997 unrounded — below the target, though it displays as 0.75 — so $225,000 is the smallest operating expenses for the OER to REACH 0.75.

Largest operating expenses for the OER to STAY at or below 0.25: At the displayed $75,000 the figures are operating expenses $75,000.00; effective gross income $300,000.00; OER 0.25 (unrounded 0.250000). At $75,001 the OER is 0.250003 unrounded — above the target, though it displays as 0.25 — so $75,000 is the largest operating expenses for the OER to STAY at or below 0.25.

Smallest effective gross income for the OER to STAY at or below 0.40: At the displayed $300,000 the figures are operating expenses $120,000.00; effective gross income $300,000.00; OER 0.40 (unrounded 0.400000). At $299,999 the OER is 0.400001 unrounded — above the target, though it displays as 0.40 — so $300,000 is the smallest effective gross income for the OER to STAY at or below 0.40.

Largest effective gross income for the OER to STAY at or above 0.60: At the displayed $200,000 the figures are operating expenses $120,000.00; effective gross income $200,000.00; OER 0.60 (unrounded 0.600000). At $200,001 the OER is 0.599997 unrounded — below the target, though it displays as 0.60 — so $200,000 is the largest effective gross income for the OER to STAY at or above 0.60.

A warning about the neighbours: every neighbour above sits one dollar from the star, and every neighbour OER is a hair below or above the target even though it displays as the target — a one-dollar move in any input moves the OER by less than 0.005, so the displayed two-decimal figure cannot tell the star from its neighbour. The page prints the unrounded six-decimal value in full so the rounding does not mislead you: 0.500000, 0.499997, 0.500002, 0.499998, 0.750000, 0.749997, 0.250000, 0.250003, 0.400000, 0.400001, 0.600000, 0.599997.

What the defaults assume

The defaults are $120,000 of operating expenses and $300,000 of effective gross income — operating expenses $120,000.00; effective gross income $300,000.00; OER 0.40. With Operating expenses $150,000, operating expenses $150,000.00; effective gross income $300,000.00; OER 0.50. With Operating expenses $90,000, operating expenses $90,000.00; effective gross income $300,000.00; OER 0.30. With Effective gross income $400,000, operating expenses $120,000.00; effective gross income $400,000.00; OER 0.30. With Effective gross income $240,000, operating expenses $120,000.00; effective gross income $240,000.00; OER 0.50. With Operating expenses $180,000, operating expenses $180,000.00; effective gross income $300,000.00; OER 0.60. With Effective gross income $200,000, operating expenses $120,000.00; effective gross income $200,000.00; OER 0.60. With Operating expenses $60,000, operating expenses $60,000.00; effective gross income $300,000.00; OER 0.20. With Effective gross income $600,000, operating expenses $120,000.00; effective gross income $600,000.00; OER 0.20. With All zero, operating expenses $0.00; effective gross income $0.00; OER undefined — no income, no expenses, and the OER is undefined. With Operating expenses $200,000, effective gross income $250,000, operating expenses $200,000.00; effective gross income $250,000.00; OER 0.80 — the expenses are four-fifths of the income. With Fractional inputs (OER unrounded 0.399999), operating expenses $119,999.50; effective gross income $299,999.75; OER 0.40 (unrounded 0.399999) — the OER displays as 0.40. With Operating expenses $1,200,000, effective gross income $2,000,000, operating expenses $1,200,000.00; effective gross income $2,000,000.00; OER 0.60 — the same ratio at ten times the size. With Effective gross income $0, operating expenses $120,000.00; effective gross income $0.00; OER undefined — division by zero, no income to divide by. With Operating expenses $0, operating expenses $0.00; effective gross income $300,000.00; OER 0.00 — no expenses, a real figure, not undefined. With Negative operating expenses, operating expenses −$10,000.00; effective gross income $300,000.00; OER −0.03 — the OER is negative, −3.33% of the income, a real figure. With Small income, operating expenses $50,000.00; effective gross income $100,000.00; OER 0.50 — half the income goes on expenses. With Fractional inputs (OER unrounded 0.333333), operating expenses $99,999.99; effective gross income $299,999.97; OER 0.33 (unrounded 0.333333) — the OER displays as 0.33. With OER above 1, operating expenses $350,000.00; effective gross income $300,000.00; OER 1.17 — the expenses exceed the income — 116.67% of it. With Operating expenses $145,000, effective gross income $290,000, operating expenses $145,000.00; effective gross income $290,000.00; OER 0.50 — half the income goes on expenses.

A note on the rounding: the OER is displayed to two decimals, half-up. With the fractional inputs the unrounded OER is 0.399999 — it displays as 0.40. The page prints the unrounded value so the rounding does not mislead you.

Output · formula · meaning

Who uses this

• The landlord checking a rental: they learn $120,000 of operating expenses against $300,000.00 of effective gross income is an OER of 0.40 — and they check the $150,000 reverse to see the expenses that push the ratio to 0.50.
• The investor comparing two properties: they learn an OER of 0.40 means forty cents of every dollar goes on running the place — and they check the $225,000 reverse to see the expenses that push the ratio to 0.75.
• The property manager pricing a fee: they learn the effective gross income is the rent minus vacancy and credit losses — and they check the $240,000 reverse to see the income that keeps the ratio at or above 0.50.
• The student learning rental ratios: they learn the OER is the operating expenses divided by the effective gross income — and they check the $75,000 reverse to see the largest expenses that keep the ratio at or below 0.25.

Accuracy & limitations

The math is first-principles: the OER is the operating expenses divided by the effective gross income — the gross potential rent minus vacancy and credit losses — all in dollars, the OER displayed to two decimals half-up. There IS division in this calculator — at $0 of effective gross income the OER is UNDEFINED, division by zero, no income to divide by — the calculator shows “OER undefined” with a note, never hides it. At $0 of operating expenses the OER is 0.00 — a real figure, not undefined — and at negative operating expenses the OER is −0.03 (−3.33%) — a refund or a bookkeeping credit, not a cost. At $350,000 of operating expenses against $300,000 of income the OER is 1.17 (116.67%) — the expenses exceed the income. With the fractional inputs the unrounded OER is 0.399999 — it displays as 0.40. What the model cannot do is price the mortgage: the OER says nothing about the debt service, the taxes or the capital improvements — a property with an OER of 0.40 can still lose money after the mortgage is paid. It also says nothing about whether the expenses are fixed or variable — insurance and taxes stay put, repairs do not. Use it to see whether the property costs too much to run — then check the debt service coverage ratio, the operating cash flow ratio and the cash flow adequacy ratio before you decide the property pays.

Frequently asked questions