What Is Operating Expenses?

Operating expenses are every dollar you spend to keep your rental property functional and income-producing. They are the costs between the rent check coming in and the profit hitting your pocket. Understanding them is critical because they directly determine your net operating income, which drives every other financial metric.

What Counts as an Operating Expense

Here is the full list of typical operating expenses for a rental property:

• Property taxes. Usually your single largest expense. Varies wildly by location. Could be $2,000/year in Alabama or $20,000/year in New Jersey for a similar property.
• Insurance. Landlord policy covering the building structure, liability, and loss of rent. Typically $800-3,000/year per property depending on size and location.
• Repairs and maintenance. Everything from fixing leaky faucets to replacing garbage disposals. Budget 5-10% of gross rent.
• Property management fees. If you hire a manager, typically 8-10% of gross rent plus leasing fees. Self-managing eliminates this.
• Utilities. Any utilities you pay: water, sewer, trash, common area electricity. If tenants pay their own utilities, this is lower.
• Landscaping and snow removal. Grounds maintenance, typically $100-400/month depending on property size.
• Pest control. Quarterly or monthly service, usually $50-150/month for a small multifamily.
• Legal and accounting. Attorney fees for lease review, evictions. CPA for tax prep. Budget $1,000-2,500/year.
• Advertising. Listing fees, photos, signage when units are vacant.
• Licenses and permits. Rental licenses, business permits, inspection fees required by your city.

What Is NOT an Operating Expense

These are commonly confused with operating expenses but are categorized differently:

• Mortgage payments. Both principal and interest are financing costs, not operating costs. NOI is calculated before debt service.
• Capital expenditures. Major improvements like a new roof, new HVAC, or full kitchen remodel. These are CapEx, not OpEx.
• Depreciation. A tax deduction, not a cash expense.
• Income taxes. Your personal tax obligation on rental income.

The distinction matters. When you calculate NOI and cap rate, you only subtract operating expenses from income. Including mortgage payments or CapEx in your operating expenses will give you incorrect numbers.

The Operating Expense Ratio

Operating Expense Ratio = Total Operating Expenses ÷ Gross Operating Income × 100

If your property generates $120,000 in gross rent and operating expenses total $48,000:

$48,000 ÷ $120,000 = 40% operating expense ratio

Typical ranges:

• 30-40%: Very efficient. Usually self-managed with low taxes.
• 40-50%: Normal range for self-managed properties.
• 50-60%: Higher side. Could be high-tax area or using property management.
• Above 60%: Needs attention. Expenses are eating too much income.

Real Example: 10-Unit Building Operating Expenses

10 units, $1,300/month average rent. Gross annual income: $156,000.

Property taxes: $14,200 (9.1%)
Insurance: $5,400 (3.5%)
Repairs and maintenance: $10,800 (6.9%)
Water/sewer/trash: $7,200 (4.6%)
Common area electric: $2,400 (1.5%)
Landscaping/snow: $3,600 (2.3%)
Pest control: $1,200 (0.8%)
Legal/accounting: $2,000 (1.3%)
Advertising: $800 (0.5%)
Licenses/permits: $400 (0.3%)
Total operating expenses: $48,000 (30.8%)

This building has a healthy 30.8% expense ratio. NOI would be $156,000 - $48,000 = $108,000 (before vacancy deduction). In practice you would also deduct 5% for vacancy, making effective gross income $148,200 and NOI $100,200.

How to Reduce Operating Expenses

Shop insurance every year. Insurance companies count on you renewing automatically. Get 3 quotes annually. I saved $1,200/year by switching carriers after 3 years of autopilot renewals.

Appeal property taxes. If your property value declined or comparable sales support a lower assessment, file an appeal. Many landlords never do this and overpay for years.

Invest in preventive maintenance. A $150 annual HVAC tune-up prevents a $5,000 emergency repair. Preventive maintenance reduces your total repair costs by 20-40% over time.

Self-manage. Property management fees of 8-10% on a $156,000 gross income property is $12,480-15,600/year. If you have the time and 10 or fewer units, self-managing is often the better financial move.

Sub-meter utilities. If you are paying water for your tenants, install sub-meters and bill them directly. Tenants use 20-30% less water when they are paying for it.

Common Mistakes

Underestimating maintenance. New landlords often budget 2-3% for repairs. The reality is closer to 8-10%, especially for older buildings. One plumbing emergency can blow a low maintenance budget in a single call.

Forgetting less obvious expenses. Pest control, gutter cleaning, fire extinguisher inspections, elevator maintenance (if applicable). These small recurring costs add up and are easy to leave out of projections.

Not tracking expenses by category. Throwing all expenses into one bucket makes it impossible to see where your money goes. Track by category so you can identify which expenses are growing and where to cut.

Frequently Asked Questions

What are typical operating expenses for rental property?

Property taxes, insurance, repairs, management fees, utilities, landscaping, pest control, and administrative costs. They typically run 35-50% of gross rental income.

Are mortgage payments an operating expense?

No. Mortgage payments are financing costs. Operating expenses only include costs of running the property. This distinction is critical for NOI and cap rate calculations.

What is a good operating expense ratio?

35-45% for self-managed properties. 45-55% with professional management. Track your ratio annually and look for ways to improve efficiency without cutting corners on maintenance.