Operating Expense

Operating expenses are the ongoing bills that keep a building running, such as taxes, insurance, management, repairs and maintenance, owner-paid utilities, leasing commissions and HOA or association dues. Operating expenses are the subtraction in the NOI formula. Mortgage payments, depreciation and capital improvements are not operating expenses.

On the default $500,000 house, operating expenses total $16,708 a year. Taxes are $6,000 and insurance $2,500. Maintenance at 5%, reserves at 5% and management at 8% of the $45,600 collected add another $8,208. That is 36.6% 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.