Certified Pennsylvania Evaluator Practice Exam

What is the calculation used to determine the expense ratio?

1. Gross rental income / total expenses

2. Allowed expenses / effective gross income

3. Total expenses / average unit cost

4. Management fees / total income

The correct answer is: Allowed expenses / effective gross income

The expense ratio is a crucial metric in property management that helps assess the operational efficiency of a real estate investment. In the context of property and real estate management, it is defined as the ratio of allowed expenses to effective gross income. The effective gross income represents the total income generated from property operations after accounting for losses such as vacancies and credit losses. Calculating the expense ratio using allowed expenses divided by effective gross income provides insight into how much of the income is being consumed by operating expenses. A lower expense ratio typically indicates more efficient management and better profitability potential, while a higher ratio might signal issues with cost management. This method of calculation effectively showcases the relationship between the income generated by the property and the necessary expenses required to maintain and operate it. Understanding this ratio helps investors and managers make informed decisions about the property’s financial health and operational strategies.