The Operating Expense Ratio (OER) is the ratio of the total operating expenses and the effective gross income of the property. Operating expenses are costs associated with the operation and maintenance of the property. Typical property expenses include such items as property taxes, insurance, pest control, utilities, repairs and maintenance, supplies, advertising, attorney fees, accounting fees, and lawn maintenance. The expense ratio is the annual fee that all funds or exchange-traded funds charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.
. Marketing and advertising: You can deduct expenses associated with running ads for tenants, as well as for hosting and maintaining a website or blog dedicated to your rental business. Property taxes: Break them out and deduct them in the year they're paid even if they're included in your mortgage payment. Insurance: Your is deductible as an operating expense even though it might also be escrowed and included in your mortgage payments.
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Utilities: You can deduct as an operating expense any utilities that you pay, including water and sewer. Trash collection: This is usually a monthly municipal charge, and it's a valid operating expense. Management: You can deduct the cost in the year paid if you hire professional management. Maintenance and repairs: You can't deduct major items like renovation, although they're often depreciable for tax purposes. You can deduct normal maintenance and repairs to the dwelling, however. Landscaping and pool care: These are operating expenses and they're deductible as well. Accounting and legal: Fees you pay to an accountant or attorney related to work performed for your rental property are deductible as operating expenses.
When owning an apartment building, an investor should figure in vacancies by using effective rental income, or potential rental income minus vacancy and credit losses, rather than potential rental income. Because managing vacancies are included in efficient property management, including vacancies in an OER gives a more accurate picture of operating expenses and shows where improvements may be made. For example, a poorly managed property will most likely have higher vacancy rates, which will be reflected in the OER. A lower OER typically means the property is being managed efficiently and is more profitable for investors, and that less of the property’s income is covering operational and maintenance costs. If the business is scalable, the owner may increase the rent on each unit without greatly increasing operating expenses.
In addition, the OER can show where potential issues may occur, such as utility bills increasing substantially, so investors can solve problems more quickly and protect their profit levels.