Vacancy reflects rental income that is lost because of space (or units in the case of residential real estate) that is not leased. Effective gross income takes into account vacancy at your property. Rather than Total Potential Income, it’s best to use Effective Gross Income (“EGI”) in the denominator. So, items like depreciation (non-cash), capital expenditures, and tenant improvement allowances are excluded from the ratio because they are not costs to help run the property. The operating expense ratio focuses on the day-to-day cash costs of running a property. Typical operating expenses for a commercial real estate property include: Operating Expense Ratio = Total Operating Expenses/Effective Gross Income What is included in operating expenses for real estate? The formula divides total operating expenses by the effective gross income of a property:
How do you calculate the operating expense ratio? As such, property owners do their best to minimize their asset's operating expense ratio. The metric describes the rental income (after vacancy) that is consumed by the property's operating expenses. The operating expense ratio, or “OER”, is a simple formula that’s easy to calculate and reveals how efficiently a property runs on a day-to-day basis.
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