Operating Expense

An operating expense is a recurring cost of running a property: property taxes, insurance, management, maintenance and repairs, utilities the owner pays, leasing commissions and association dues. Operating expenses are the subtraction in the NOI formula. Mortgage payments, depreciation and capital improvements are not operating expenses.

On the default $300,000 house, operating expenses total $10,230 a year. Taxes are $3,600 and insurance $1,500. Maintenance at 5%, reserves at 5% and management at 8% of the $28,500 collected add another $5,130. That is 35.9% of effective gross income, which is a normal ratio for a single-family rental with taxes near 1.2% of value.

The Wikipedia article has a real-estate section that lists the standard lines, and it is a useful checklist when a listing shows suspiciously low expenses. The most common omissions are management, because the seller self-manages, and reserves, because the roof has not failed yet. Both belong in the statement whether or not a check was written this year.

Further reading: Operating Expense on Wikipedia.