Operating Expense Ratio (OER)
The operating expense ratio is operating expenses divided by effective gross income — a quick read on how much of a property's revenue is consumed by running it.
Operating expense ratio (OER) is total operating expenses divided by effective gross income — the share of collected revenue eaten by the cost of running the property, before debt service and capital items.
How it's used: OER is a sanity check on the expense side of a pro-forma. You compare it against the asset class and the property's own history: stabilized multifamily often runs roughly 35–50%; a true NNN deal is far lower because the tenant pays most property costs directly. A ratio that looks too good usually means expenses are understated, not that the building is unusually efficient.
Why it matters: because expenses sit directly above NOI, an artificially low OER inflates NOI, the cap rate, and the price. The most common broker maneuver is to drop or understate management, reserves, and payroll — checking OER against comparable properties catches it quickly.
Formula: OER = Operating expenses ÷ Effective gross income
(Whether reserves belong in the ratio is a judgment call — be consistent, and prefer the post-reserves view for honesty.) The multifamily underwriting guide walks a realistic expense load line by line.
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