What is the operating expense ratio (OER) formula?

• A. OER = operating expenses / gross potential income
• B. OER = gross potential income / operating expenses
• C. OER = net operating income / gross potential income
• D. OER = operating expenses / actual rents collected

Answer: (A)

The operating expense ratio shows what portion of gross potential income is consumed by operating costs. It is computed by dividing operating expenses by gross potential income. Operating expenses are the ongoing costs to run the property (maintenance, taxes, insurance, utilities paid by the owner, management, etc.), while gross potential income is the total rent the property could generate if fully leased with no vacancies. So this ratio expresses the percentage of potential income that must be spent on operating the property. The other formulations mix the order, use the wrong numerator, or use actual rents collected (which reflects vacancies and collections) rather than the full potential, so they don’t measure the expense burden in the same way.