In Practice
The expense ratio tells you how much of the money coming in goes right back out to run the property. Divide operating expenses by effective gross income and you get a percentage. If it is 45 percent, then 45 cents of each income dollar goes to payroll, repairs, utilities, insurance, taxes and the other recurring costs.
Owners and regional managers use it to compare communities and to spot trouble. A ratio that creeps up can mean income is slipping, costs are rising or both. As a manager, you influence the controllable parts: payroll, repairs and maintenance, turns, marketing and supplies. Taxes and insurance are mostly out of your hands, though you may help with appeals and claims.
An example: a community with 2,350,000 dollars of effective gross income and 1,100,000 dollars of operating expenses has an expense ratio of about 47 percent.
A common mistake is chasing a lower ratio by cutting spending that protects income, such as skipping preventive maintenance or marketing in a slow month. That can raise future costs and cut revenue. Another is comparing ratios across properties without noticing differences in age, size, utilities paid and local taxes.
How to calculate it
Expense ratio = total operating expenses divided by effective gross income. Example only: 1,100,000 divided by 2,350,000 is about 0.47, or 47 percent.
Expense Ratio: Common Questions
What is a good expense ratio for apartments?
It varies by property age, size, location and which utilities the owner pays. Compare against your own history and similar properties rather than a single target.
Do capital expenditures count in the expense ratio?
Usually not. The expense ratio uses operating expenses, and capital spending is tracked separately.
