What is a good operating expense ratio for a rental property?

For long-term rentals (LTR), a healthy OER is 35-45%. For short-term rentals (STR) like Airbnb and VRBO properties, OER is typically higher at 50-65% due to turnover cleaning, supplies, platform fees, and higher utility costs. An OER above 70% for any property type warrants investigation.

Does OER include mortgage payments?

No. OER only includes operating expenses — costs required to run the property day-to-day. Mortgage principal and interest are financing costs, not operating costs. This is the same distinction used in NOI calculations.

What's the difference between OER and cap rate?

OER measures how efficiently you run a property (what percentage of income goes to expenses). Cap rate measures the return on investment (NOI divided by property value). They're related — a lower OER means higher NOI, which means a better cap rate, all else being equal.

How can I lower my operating expense ratio?

You can lower OER by increasing income (raise rents, reduce vacancy, add revenue streams) or decreasing expenses (shop insurance annually, contest property taxes, do preventive maintenance, negotiate vendor contracts, install energy-efficient appliances). Focus on the largest expense categories first for the biggest impact.

Is depreciation included in OER?

No. Depreciation is a non-cash tax deduction, not an actual operating expense. OER only includes real cash outflows required to operate the property.

Operating Expense Ratio (OER) for Rental Properties

What Is the Operating Expense Ratio?

The Operating Expense Ratio (OER) is the percentage of a property's gross income that goes toward operating expenses. It measures efficiency — how much of every dollar you collect in rent is consumed by the costs of running the property. A lower OER means more of your income flows through to profit. A higher OER means your expenses are eating into your returns. Unlike cash flow or net profit, OER strips out mortgage payments and depreciation to focus purely on operational performance.

The OER Formula

The calculation is straightforward:

OER = Operating Expenses / Gross Rental Income × 100

For example, if your property generates $48,000 in annual rent and your operating expenses are $19,200, your OER is 40% ($19,200 / $48,000 × 100). This means 40 cents of every dollar of rent goes to expenses, and 60 cents flows to NOI.

OER Benchmarks by Property Type

Property Type	Target OER	Why
Long-Term Rental (LTR)	35-45%	Lower turnover, tenant pays some utilities, minimal supplies/cleaning
Short-Term Rental (STR)	50-65%	Frequent cleaning, supplies, platform fees, all utilities, higher maintenance
Multi-Family (5+ units)	35-50%	Economies of scale offset common area costs
Warning Zone	70%+	Investigate immediately — expenses are too high relative to income

What's Included in OER

Operating expenses in the OER calculation include:

•Property taxes: Annual real estate taxes assessed by local government
•Insurance: Landlord hazard insurance, liability, flood if applicable
•Repairs & maintenance: Routine fixes, HVAC servicing, plumbing, appliance repair
•Property management: Management fees, co-host fees, leasing commissions
•Utilities: Electric, gas, water, internet, cable — whatever the landlord pays
•Cleaning & turnover: Especially significant for STR properties
•Supplies: Consumables, linens, toiletries for STR
•Advertising & platform fees: Airbnb/VRBO host fees, listing fees, photography
•HOA/Condo fees: Monthly or quarterly association dues
•Legal & professional: Attorney, CPA, bookkeeper fees related to the property

What's NOT Included in OER

×Mortgage payments: Principal and interest are financing costs, not operating costs
×Depreciation: A non-cash tax deduction, not a real expense
×Capital expenditures: Major improvements (new roof, HVAC replacement) are not day-to-day operating costs
×Income taxes: Your personal tax liability is separate from property operations

How to Lower Your OER

You can improve OER by increasing income, decreasing expenses, or both. Focus on the largest categories first:

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Shop insurance annually

Get 3-4 quotes every year. Landlord insurance is competitive and switching can save 15-30%.

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Contest your property taxes

Many assessments are inflated. Filing a protest costs nothing and can save hundreds per year.

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Negotiate vendor contracts

Lock in annual rates for cleaning, landscaping, and pest control instead of paying per-visit.

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Preventive maintenance

A $150 HVAC tune-up prevents a $3,000 emergency repair. Budget 5-10% of rent for maintenance.

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Energy efficiency

LED bulbs, smart thermostats, and low-flow fixtures reduce utility costs 10-20%.

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Raise rents to market

If you haven't raised rent in 2+ years, you're leaving money on the table. Even the denominator matters.

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Reduce vacancy

Every vacant month is 100% expense with 0% income. Price competitively and respond to inquiries fast.

OER vs. Other Metrics

Metric	What It Measures	Includes Mortgage?
OER	Expense efficiency (% of income to expenses)	No
NOI	Operating profit (income minus operating expenses)	No
Cash Flow	Actual money left after all costs	Yes
Cap Rate	Return on property value (NOI / value)	No