How to calculate the operating expense ratio for a rental property
The operating expense ratio is operating expenses divided by effective gross income, shown as a percent. A building that takes in $114,000 and spends $42,000 to run has a ratio of 36.8%. Leave out loan payments, depreciation and big replacements, or the ratio will not compare with anything.
The formula
Operating expense ratio (OER) = operating expenses divided by effective gross income (EGI). Effective gross income is the rent you would collect with every unit rented, less vacancy and unpaid rent, plus other income such as laundry or parking.
Example a made-up 10-unit building has potential rent of $120,000 and loses $6,000 to vacancy, so EGI is $114,000. Operating expenses are $42,000. The ratio is $42,000 divided by $114,000, which is 36.8%. That is $4,200 per unit per year.
Both numbers should come from the same twelve months. A trailing twelve month statement, often called a T12, is the usual source.
What goes in operating expenses
Operating expenses are the costs of running the building as it is today. IRS Publication 527 lists the deductible rental costs, and most of them belong here. Depreciation and loan principal do not, as explained below.
| Operating expense | Yearly amount |
|---|---|
| Property tax | $12,000 |
| Insurance | $4,800 |
| Repairs and maintenance | $8,400 |
| Utilities paid by the owner | $6,600 |
| Management and admin | $7,200 |
| Landscaping and trash | $3,000 |
| Total | $42,000 |
Example with made-up numbers. The total is 12,000 plus 4,800 plus 8,400 plus 6,600 plus 7,200 plus 3,000.
Put a management fee in even if you manage the building yourself. Your time has a price, and a buyer or lender will add one. Leaving it out makes a self-managed building look better than the same building run by a manager.
What stays out
- Mortgage principal and interest. These are financing, not operating costs. They matter for DSCR, not here.
- Depreciation. It is a tax deduction, not money out the door.
- Capital improvements, such as a new roof. They are better handled in a yearly reserve than inside one year's ratio. See repair or improvement if a bill is unclear.
- Income tax and your own personal costs.
Mixing these in is the most common reason two ratios do not match. If a seller's number looks low, check whether the management fee, the reserve, or a large repair was left out.
How to use the ratio
There is no rule that fits every building. Age, size, who pays utilities and the local tax rate all change it. The value is in comparing: your building against your own past years, and against similar buildings you can see numbers for.
- A ratio that creeps up over several years usually means taxes, insurance or repairs are growing faster than rent.
- A single line far above the others deserves a look. Break it out by month and by vendor.
- A ratio that is much lower than similar buildings may mean deferred repairs, not good management.
Be careful with one-time items. A large insurance claim, a single big repair or a refund can distort one year's ratio. Show the ratio with and without the item, and write down why, so the number next year is read in the right light.
Track it per unit too. In the example, $42,000 over 10 units is $4,200 a unit, which you can set against your yearly maintenance budget per unit.
How DoorKeeping handles it
In DoorKeeping the profit and loss for each property is built from approved, categorized transactions, so operating expenses are already grouped by Schedule E category. Ask Claude or ChatGPT for the last twelve months for one property and for its net operating income, and the assistant can divide. Bills the assistant reads are coded by AI and wait for your one-tap approval before they post.
Sources
- IRS, Publication 527, Residential Rental Property (rental expenses), read Oct 30, 2026
Questions
- What is a normal operating expense ratio for apartments?
- It varies with age, size and who pays utilities, so compare against similar buildings and your own history rather than one fixed number.
- Does the operating expense ratio include the mortgage?
- No. Loan principal and interest are financing costs. They are left out so buildings with different loans can be compared.
- Should I include depreciation?
- No. Depreciation is a non-cash tax deduction and does not belong in operating expenses.
- Is operating expense ratio the same as expense ratio?
- Usually, yes. Always check the definition, since some people divide by potential rent instead of effective gross income.