Operating expenses
Definition:
Operating expenses refer to the costs associated with maintaining and running a rental or income-generating property. These expenses typically include property taxes, insurance, maintenance, property management fees, utilities, and repairs. Operating expenses are important to account for when calculating a property’s profitability, as they directly impact the net operating income (NOI).
🔍 Did You Know?
Operating expenses typically range between 30% and 40% of the gross rental income. Tracking and managing these expenses can make a significant difference in the overall return on investment (ROI) for a property.
Tip: Always ask a property manager for their NOI (net operating income) margin, which is the inverse of the operating expense % above. Good ones will both know this number and be able to explain it with ease.
Examples:
Example 1:
A landlord rents out a property for $3,000 per month. The monthly operating expenses include $200 for property taxes, $100 for insurance, $200 for maintenance and repairs, and $150 for utilities. The total operating expenses are $650 per month.
Example 2:
An investor owns a multi-family apartment building. The annual rental income is $200,000, and the total operating expenses (including property management, taxes, insurance, and utilities) amount to $60,000. The operating expense ratio is:
[($60,000 ÷ $200,000)] x 100 = 30%
Why It’s Important:
Operating expenses play a key role in determining the profitability of a rental property. Investors and landlords must carefully track these costs to ensure the property generates positive cash flow. Understanding operating expenses also helps with making accurate financial projections and determining the net operating income (NOI), which is critical for evaluating property performance.
Who Should Care:
- Real estate investors who need to understand how operating expenses impact profitability.
- Landlords looking to maintain positive cash flow by managing expenses.
- Property managers responsible for tracking and optimizing the day-to-day costs of operating a rental property.
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