How To Lower Operating Expenses for a Rental Property

Disclaimer: PropStream doesn't offer investing or tax advice; this article is for educational purposes only. Before attempting to invest in real estate, we recommend doing your due diligence and consulting with financial and tax professionals as needed.

To maximize the profitability of a rental investment, you generally have two options: Increase rent or lower operating expenses.

However, rents can only be raised so far before they hit market rates and risk losing tenants. The more pragmatic approach is identifying ways to lower operating expenses without sacrificing the property’s condition or your tenants’ comfort.

In this article, we’ll define rental operating costs, how they impact key investment metrics, and ways to lower them to increase your investment’s profitability, cash flow, and resale value.

What Are Rental Property Operating Expenses?

Rental property operating expenses (aka OpEx) are the regular ongoing costs associated with maintaining, managing, and operating a rental property.

Some examples include repairs, maintenance, marketing, leasing, property management, vacancy costs, property taxes, utilities, and landlord insurance.

Costs not typically considered operating expenses (aka “below the line” expenses) include capital expenditures (CapEx), financing costs, depreciation costs, and other owner-specific expenses such as income taxes.

Calculating Net Operating Income and Operating Expense Ratio

Knowing a rental property’s total operating expenses lets you calculate other investment metrics such as net operating income (NOI) and operating expense ratio (OER).

Net Operating Income

Net operating income measures the profitability of a property by subtracting its operating expense from its revenue (typically on a monthly basis). Here’s the formula:

If NOI is positive, that means the property is making money (note, however, that this doesn’t consider mortgage costs and other below-the-line expenses). Conversely, if NOI is negative, the property is losing money.

Operating Expense Ratio

The operating expense ratio (OER) measures the cost of operating a property compared to the income it generates. It’s calculated by dividing a property’s operating expenses by its revenue:

The higher a property’s OER, the less effective its operation. Conversely, the lower a property’s OER, the more effective its operation. Aim for an OER of 60-80% or lower.

10 Ways to Lower Rental Property Operating Costs

The key to increasing NOI and lowering OER is to lower operating expenses. Here are ten ways to do just that:

1. Make energy-efficient upgrades. This can include replacing old appliances with Energy Star-rated ones, switching to LED bulbs, and installing smart thermostats that automatically adjust heating and cooling based on temperature.
2. Conserve water. While you may be unable to control tenants’ water usage, you can install low-flow fixtures and respond promptly to leaks to avoid unnecessary water costs. Monitor water meters closely to stay on top of any irregularities.
3. Perform preventative maintenance. This includes conducting regular property inspections, keeping up with seasonal maintenance, and educating tenants on how to properly use and maintain appliances. That way, you can address potential issues before they turn into costlier repairs.
4. Streamline property management. Consider investing in property management software to automate repetitive tasks like maintenance requests and rent collection. Alternatively, you can outsource property management to a reliable property manager, thereby leveraging their expertise, network, and scale.
5. Lower vacancy rates. To attract new tenants and minimize vacancies, set competitive rent rates. You can also advertise units on multiple marketing channels, such as online listings, social media, and local classifieds.
6. Improve tenant retention. Foster good relationships with current tenants to encourage them to renew leases and reduce your turnover costs. Consider incentivizing lease renewals with minor upgrades and rent discounts.
7. Shop around for better insurance. Landlord and property insurance can get expensive fast. If you haven’t checked rates recently, consider shopping around or bundling different insurance policies to get a better deal.
8. Claim tax deductions and incentives. As a landlord, you can deduct mortgage interest, property taxes, and other property expenses such as repairs and maintenance. Additionally, you may qualify for federal, state, and local tax incentives for energy-efficient upgrades. Consult a tax professional to learn more.
9. Optimize landscaping. To cut landscaping costs, opt for native and drought-resistant plants that require less water and maintenance. Additionally, consider installing a smart irrigation system that adjusts the watering schedule based on weather conditions.
10. Purchase supplies in bulk. Buy maintenance, cleaning, and other supplies in bulk to benefit from discounts and reduce per-unit costs. Build relationships with suppliers to negotiate better rates for recurring orders.