Operating Expense Ratio (OER) is a ratio of property performance. More specifically, it measures the relationship between the income of the property (which is primarily derived from rents) and a basic recurring cost element, the operating expenses.
We can estimate two OERs, one based on potential gross income and one on effective gross income. The formulas for calculating these two income measures as well as operating expenses for a rental property are provided in the e-book Real Estate Investment Mathematics.
The formula for calculating the OER based on Potential Gross Income is:
OER = Operating Expenses/Potential Gross Income
The formula for calculating the OER based on Effective Gross Income is:
OER = Operating Expenses/Effective Gross Income
These ratios are usually below 1. If they are greater than one it means that the operating expenses are greater than the income the property is expected to produce or is producing.
