The Expense Ratio That Should Scare You

I pulled the financials on a 24-unit building an investor asked me to review last quarter. On paper, the property looked fine. $19,200/month in gross rent. Good location. Decent tenants.

Then I looked at the expenses.

The operating expense ratio was 61%. For every dollar of rent collected, sixty-one cents vanished before the owner saw a dime. His annual NOI on a building generating $230,400 in gross revenue was just $89,856.

At a 7 cap, that building was worth roughly $1.28 million. If he got that ratio down to 42%, which is achievable for a B-class 24-unit in the Omaha metro, his NOI jumps to $133,632. That same building is now worth $1.91 million.

Same building. Same rents. Same tenants. $630,000 in value difference. All from expenses.

That's why the expense ratio should scare you. Not because high expenses exist, but because most owners don't realize how much value they're bleeding.

What the Expense Ratio Actually Measures

The operating expense ratio is simple math. Total operating expenses divided by gross operating income.

Operating expenses / Gross operating income = Expense ratio

Operating expenses include everything it takes to run the property: management fees, insurance, property taxes, maintenance, utilities, landscaping, pest control, administrative costs, and any other recurring expense. They don't include debt service, capital expenditures, or depreciation.

Gross operating income is your effective gross income after vacancy and credit loss. Not gross potential rent. What you actually collected.

The ratio tells you how efficiently the property converts revenue into profit. A lower ratio means more of every dollar flows to the bottom line. A higher ratio means the property is eating its own revenue.

Benchmarks by Property Class

Not every property should run the same expense ratio. A Class A new-construction property has different cost drivers than a 1960s Class C building. Here are the benchmarks we use for the Omaha metro.

Class A (built after 2010, amenity-rich):

Target expense ratio: 35-40%

These properties have lower maintenance costs (everything is new), but higher management and amenity costs (pools, fitness centers, community spaces, on-site staff)

Insurance tends to be lower per unit because construction quality reduces claims

Class B (1980s-2000s, good condition, may be renovated):

Target expense ratio: 38-45%

This is the sweet spot for most Midwest investors. Maintenance costs are moderate if the building has been maintained. Insurance is reasonable. Taxes are proportional.

An expense ratio above 48% in this class means something is wrong

Class C (pre-1980, older systems, deferred maintenance common):

Target expense ratio: 42-50%

Higher maintenance costs are structural, not managerial. Old plumbing, old electrical, old HVAC all cost more to maintain. Insurance is higher because claims are more frequent.

An expense ratio above 55% in this class requires immediate diagnosis

Class D (significant deferred maintenance, high-risk tenant base):

Expense ratios can run 50-60%+

At this level, the question isn't how to optimize. It's whether the property should be repositioned, gut-renovated, or sold.

If your expense ratio is more than 5 points above the benchmark for your property class, you're leaving real money on the table. And that money compounds every year you ignore it.

Diagnosing a Bloated Ratio

A high expense ratio is a symptom. The diagnosis requires going line by line through the operating statement. Here's what I look for.

Insurance

This is the expense line that has moved the most aggressively in the last 3 years. Multifamily insurance in Nebraska is up 29% year over year. That isn't hyperbole. I have seen policies on 20-unit buildings jump from $12,000 to $18,000 in a single renewal cycle.

Diagnosis questions:

When did you last shop your policy? If it has been more than 12 months, you're overpaying.

What's your deductible? Increasing your deductible from $1,000 to $5,000 can reduce premiums by 10-20% on a small multifamily property.

Are you bundled with an umbrella policy? Bundling typically saves 5-15%.

Is your coverage amount accurate? Over-insuring (especially on older buildings) inflates premiums without meaningful benefit.

The fix: Get 3 to 4 competitive quotes annually. Work with a broker who specializes in multifamily, not a generalist who also insures your car. We review every policy in our portfolio annually and have saved ownership groups $2,000 to $8,000 per property through competitive quoting alone.

Property Taxes

In Douglas County, the assessor reassesses properties annually. If your assessed value has increased disproportionately to your actual income, you have a case for appeal.

Diagnosis questions:

Has your assessed value increased faster than your rents?

Are comparable properties in your submarket assessed at a lower per-unit value?

Have you ever filed an appeal?

Most owners never file. The success rate on well-prepared appeals is higher than people think. The savings recur every year until the next reassessment. A $500 investment in a property tax appeal can yield $1,500 to $3,000+ in annual savings.

Maintenance and Repairs

This line item has the most variance and the most room for optimization.

Diagnosis questions:

What's your per-unit maintenance cost? The Omaha benchmark for B-class product is roughly $800 to $1,200 per unit per year for routine maintenance. If you're significantly above that, you either have deferred maintenance catching up or an inefficient maintenance process.

Are you using a preventive maintenance schedule? Reactive maintenance (fixing things when they break) costs 2 to 3 times more than preventive maintenance (scheduled inspections and service).

Are your vendor costs competitive? When was the last time you bid out your HVAC, plumbing, and electrical contractors? We rebid our vendor contracts every 18 to 24 months and consistently find 10-15% savings by introducing competition.

Are you tracking repeat work orders? If the same unit has had 4 plumbing calls in 6 months, you don't have a maintenance problem. You have a capital expenditure need disguised as maintenance.

Management Fees

If you use third-party management, this line is typically 8-10% of gross collected rent. That's market. If you're paying more than 10%, you should understand why.

If you self-manage, you likely show 0% on this line. But that doesn't mean management is free. Your time has value. And if you're spending 15 hours a week managing a 20-unit building, the opportunity cost of that time is real. We underwrite every property with professional management at 8-10%, even when we manage internally, because it gives us a true picture of the property's economics.

Utility Expenses

Owner-paid utilities are one of the most controllable expense categories, yet most owners treat them as fixed costs.

Quick wins:

RUBS implementation. Ratio Utility Billing Systems allow you to bill back a portion of water, sewer, and trash to tenants. A properly implemented RUBS program recovers 70-85% of common utility costs. On a 20-unit building paying $1,500/month in water and sewer, that's $12,600 to $15,300 per year in recovered expense.

LED conversion. Common area and exterior lighting. Payback period is typically 8 to 14 months, then you're saving 50-70% on lighting electricity for the next decade.

Timer and sensor installation. Hallway lights on 24/7? Parking lot lights running during daylight? These are small leaks, but on a 20+ unit property, they add up to $1,000 to $2,000/year in unnecessary utility cost.

Vacancy and Turnover

This is the hidden expense most owners don't track as an operating cost. Every unit turn costs between $3,000 and $5,000 when you add vacancy loss, make-ready labor and materials, and marketing cost.

If you're turning 30% of your units annually on a 20-unit building, that's 6 turns at roughly $4,000 each: $24,000/year in turnover-related expense. Reduce turnover by 30% through better tenant retention, and you save $7,200/year. That's a meaningful impact on a 20-unit P&L.

The Compound Effect of Small Improvements

Here's the part that most owners miss. Expense ratio improvements compound.

Save $3,000 on insurance. Recover $12,000 through RUBS. Reduce turnover cost by $7,000. Cut maintenance inefficiency by $4,000. File a property tax appeal and save $2,000.

Total: $28,000 in annual expense reduction on a 20-unit building.

At a 7 cap, that's $400,000 in additional property value. Created not by raising rents, not by buying another building, not by taking on more debt. Just by managing what you already own more effectively.

That's asset management. Not a fancy title. A set of disciplines that produce measurable results.

The First Step

Pull your trailing 12-month operating statement. Calculate your expense ratio. Compare it to the benchmarks above. If the gap is more than 5 points, you have work to do, and the upside of doing it's likely six figures in property value you're currently leaving on the table.

The expense ratio is the number that tells you the truth about how your property is being managed. Most owners don't want to hear it. The ones who listen are the ones who build real wealth.

If you own rental properties and you're not sure they're hitting their ceiling, let's talk. Reach out at Tanner@TopTierInvestmentFirm.com.

Tanner Sherman is the Principal and Managing Broker of Top Tier Investment Firm in Omaha, Nebraska. He co-hosts the Freedom Fighter Podcast with Ryan of Avara Investments.

Related Reading

Deferred Maintenance Is Deferred Expense, Not Deferred Savings

The Insurance Claim That Almost Bankrupted a 20-Unit Building

The Owner Report You Should Be Getting Every Month

The Annual Budget Process for a Multifamily Building

The Difference Between Asset Management and Property Management