What is the formula for calculating the Operating Expense Ratio (OER)?

The Operating Expense Ratio (OER) is a crucial metric used in real estate to evaluate the efficiency of property management in generating income relative to its operating expenses. The correct formula for calculating OER is Operating Expenses divided by Effective Gross Income. This ratio provides insights into how much of the income generated by a property is consumed by its operational costs.

Calculating OER allows investors and property managers to assess the financial health of a property. A lower ratio indicates that a smaller portion of income goes toward expenses, implying better management efficiency and higher profitability potential. Conversely, a higher ratio suggests that more income is being spent on operational costs, which could indicate potential issues with property management or market conditions.

In contrast to the other options, the formulas provided do not represent the correct calculation for OER. For example, calculating Operating Income divided by Total Revenue focuses on profitability rather than expense management, and using Total Expenses divided by Property Sales Price relates to investment metrics rather than operational efficiency. Lastly, Net Operating Income divided by Total Expenses gives insights into profitability but does not quantify the relationship between operating expenses and income directly, which is the primary purpose of the OER.