Most apartment owners in Los Angeles can tell you roughly what they collect in rent every month. Far fewer can tell you what their expense ratio is and almost none of them know whether that number is good, bad, or costing them tens of thousands of dollars a year in lost equity.
This post is going to change that.
What Is an Expense Ratio and Why Does It Matter
Your expense ratio is the percentage of your gross income that goes toward operating the building. The formula is simple. Take your total annual operating expenses, divide them by your gross annual income, and multiply by one hundred. The number you get is your expense ratio.
Operating expenses include property taxes, insurance, utilities, maintenance, repairs, property management fees, landscaping, pest control, and any other cost associated with running the building day to day. What they do not include is your mortgage payment or capital improvements.
The reason this number matters so much is that it directly determines your NOI, your net operating income. In multifamily real estate, your NOI is a major factor in determining the value of your building. A lower expense ratio means more income flows through to your bottom line, which means a higher NOI, which means more money in your pocket each month AND a more valuable asset. Every percentage point you can bring that ratio down without cutting corners is money in your pocket and equity in your building.
What a Good Expense Ratio Looks Like in Los Angeles
For multifamily apartment buildings, the generally accepted target range for an expense ratio is 35 to 45 percent of gross income. In Los Angeles specifically, operating expenses for apartments average around 35 percent of rental income, which sits at the favorable end of that range nationally.
If your expense ratio is sitting below 40 percent and your building is well maintained, that is a sign of solid operational efficiency. If it is creeping toward 50 percent or above, that is a signal worth paying close attention to.
A few things worth knowing about what drives expense ratios in Los Angeles specifically.
Property taxes are one of the largest line items for most owners. In California, Proposition 13 limits how much your assessed value can increase annually, which works in long-term owners' favor. But if you purchased recently or if a reassessment is coming, property taxes can represent a significant and growing portion of your expenses.
Insurance costs have risen sharply in recent years across Southern California. Some owners have seen their premiums increase by double digits year over year. If you have not shopped your coverage recently, you may be paying significantly more than you need to for the same protection.
Utilities are another major variable, especially in older buildings where the owner covers water, gas, or trash for the whole property. There are strategies to reduce this exposure, including billing back tenants through a RUBS system or individual metering, that can meaningfully improve your expense ratio over time.
Property management fees typically run between six and eight percent of gross rents. If you are self-managing, this line item looks favorable on paper, but the actual cost of your time and the risk of mismanagement often outweigh what you appear to be saving.
Why Expense Ratios Are Getting Harder to Control Right Now
The operating environment for Los Angeles apartment owners has gotten meaningfully more challenging over the past several years. Expenses have risen significantly while rent growth has been constrained, particularly for RSO properties.
The current allowable annual rent increase for RSO units in the City of Los Angeles is 3 percent through June 2026. Starting July 2026, the formula changes and the maximum allowable increase drops to 4 percent with a floor of 1 percent tied to 90 percent of CPI. For owners of rent controlled buildings, that means income growth is capped in a way that expenses simply are not.
When your revenue has a ceiling and your costs keep climbing, the expense ratio is the place where you feel it first. And that squeeze is exactly why so many owners of older buildings in Los Angeles are seeing their returns compress even when their rents appear stable.
What a High Expense Ratio Is Actually Costing You
Here is the number that makes this real. If your building generates $200,000 in gross annual income and your expense ratio is 55 percent, your NOI is $90,000. If you could bring that ratio down to 40 percent through better vendor pricing, insurance review, or utility pass-backs, your NOI jumps to $120,000.
At a five cap, that $30,000 difference in annual NOI represents $600,000 in building value. That is the actual difference in what a buyer would pay for your building based on what it actually produces.
Your expense ratio is not just another operational metric. It is one of the most direct levers you can pull on your building's value.
How to Find Out Where You Actually Stand
The first step is pulling your actual numbers, not estimates. Total every operating expense from the past twelve months and divide by your gross income for the same period. That is your real expense ratio.
Once you have it, compare it against the 35 to 45 percent target range and look at each line item individually. The goal is not to cut everything indiscriminately. The goal is to identify which expenses are higher than they should be and which ones can be reduced without affecting the quality of the building or the experience of your tenants.
Common areas worth examining first include insurance, property management, utilities, and landscaping or maintenance contracts. In our experience these are the line items where owners most frequently find room to improve without making meaningful sacrifices elsewhere.
How We Help
An expense review is one of the core components of the McCann Multifamily Stress Test. When we sit down with an owner we go through the actual operating expenses line by line, compare them against what we typically see for similar properties in the same submarket, and identify the specific areas where there is room to improve.
We look at whether you are overpaying for insurance, whether there are utility costs you could be passing back to tenants, whether your management fees are in line with the market, and whether deferred maintenance is creating compounding costs that are inflating your ratio over time.
By the end of the session you know exactly what your expense ratio is, how it compares to what it should be, and what the two or three most impactful changes are that you could make to bring it down.
That conversation is free and the improvement it leads to can be worth far more than most owners expect going in.
