Operating Expense Ratio is defined as which ratio?

Operating Expense Ratio is defined as which ratio?

• A. OER = Net Operating Income / Effective Gross Income
• B. OER = Operating Expenses / Gross Income
• C. OER = Effective Gross Income / Operating Expenses
• D. OER = Operating Expenses / Effective Gross Income

Answer: (D)

The main idea is to see what portion of the property’s income is consumed by operating costs. The operating expense ratio measures how much of the income actually available to cover expenses is taken up by those operating costs, so it uses Operating Expenses in the numerator and Effective Gross Income in the denominator. In symbols, OER = Operating Expenses / Effective Gross Income. This matters because Effective Gross Income accounts for vacancies, credits, and other income adjustments, giving a true picture of the income base before expenses. Using Net Operating Income would shift the focus to profitability rather than the cost burden, using Gross Income instead of Effective Gross Income ignores vacancy/credit losses, and flipping the ratio (EGI / Operating Expenses) would invert the relationship, not reflect the expense burden on available income.

The main idea is to see what portion of the property’s income is consumed by operating costs. The operating expense ratio measures how much of the income actually available to cover expenses is taken up by those operating costs, so it uses Operating Expenses in the numerator and Effective Gross Income in the denominator. In symbols, OER = Operating Expenses / Effective Gross Income. This matters because Effective Gross Income accounts for vacancies, credits, and other income adjustments, giving a true picture of the income base before expenses. Using Net Operating Income would shift the focus to profitability rather than the cost burden, using Gross Income instead of Effective Gross Income ignores vacancy/credit losses, and flipping the ratio (EGI / Operating Expenses) would invert the relationship, not reflect the expense burden on available income.