Fixed Expense
Ratio
Operating analysisTotal Expense Ratio is a useful metric for investors to understand the ongoing fixed financial commitments associated with a property and helps assess its profitability.
Metrics
Fixed Expense Ratio
Compare price by the size of
What is Fixed Expense ratio
Fixed expense ratio (FER) is similar to a Total expense ratio which both aim to calculate how large the expenses are relative to the price of the property. This is important to understand because it impacts the long-term profitability of the property.
The FER only takes into account the fixed costs of the property and then calculates the relative annual expenditure of these costs.
Calculating FER
To calculate the FER for a property we simply add up all the fixed costs and than divide by the total property price.
Since it is not possible for us to know all of the fixed costs for a property we have simplified the formula to only include the below costs:
- Rates
- Land taxes
- Body corporate (If applicable)
Lets take a look at an example:
- Johnathan purchased an investment property for $500,000
- The property has the following fixed annual costs:
- Rates: $700
- Land taxes: $950
- Body corporate: $1,650
Formula
(rates + landTaxes + bodyCorporate) / price($700 + $950 + $1,650) / $500,000$3,300 / $500,000 = 0.00660.0066 x 100 = 0.66%Johnathans's fixed costs are 0.66% relative to priceSince fixed costs are unlikely to change drastically over time relative to other properties it is important to compare these values with other properties.
A property with better yield could still offer lower long-term returns if the costs are higher.