Is the mortgage an operating expense?

No. Debt service is excluded from operating expenses by convention, because it reflects the buyer’s financing rather than the property’s economics. That separation is what allows NOI and cap rate to be compared across buyers. Cash-flow analysis then subtracts the mortgage after NOI. Income taxes and depreciation are also excluded, they belong to the owner’s tax situation, not property operations.

What operating expenses do new investors most often forget?

Vacancy and collection loss, turnover make-ready costs (paint, cleaning, small repairs between tenants), property management (even if self-managing today), rising insurance premiums, and lumpy maintenance like water heaters and appliances. Individually small, together these commonly add 15% to 25% of gross rent, exactly the gap between a pro forma that looks great and a property that breaks even.

Real Estate Investing Glossary

Operating Expenses

Last reviewed 2026-07-15

Operating expenses are the recurring costs of running a rental, taxes, insurance, management, maintenance, utilities, but not mortgage payments or capex.

What are operating expenses?

Operating expenses (opex) are the ongoing costs required to keep a rental property running and producing income. The standard list includes property taxes, insurance, property management fees, repairs and maintenance, landlord-paid utilities, HOA dues, landscaping and pest control, licensing, and an allowance for vacancy and collection loss.

Two big costs are deliberately excluded. Debt service (mortgage payments) is a financing choice, not a property cost, keeping it out lets NOI and cap rate describe the asset itself. Capital expenditures (roofs, HVAC systems, full renovations) are investments in the asset rather than period costs, though prudent investors still reserve for them monthly when projecting cash flow.

Opex ratios for single-family rentals typically land between 35% and 50% of gross rent over time, the basis of the 50% rule. When evaluating a seller’s pro forma, the most common tricks are omitting management (assuming self-management), understating maintenance, and ignoring vacancy; rebuilding the expense stack line by line from actual tax records and quotes is a core due diligence step.

Worked example

A rental grossing $21,600 per year carries $3,800 property taxes, $1,500 insurance, $1,944 management (9%), $1,800 maintenance, $500 lawn and pest, and $1,080 vacancy allowance (5%). Total operating expenses = $10,624, about 49% of gross rent, leaving NOI of $10,976.

Frequently asked questions

Is the mortgage an operating expense?: No. Debt service is excluded from operating expenses by convention, because it reflects the buyer’s financing rather than the property’s economics. That separation is what allows NOI and cap rate to be compared across buyers. Cash-flow analysis then subtracts the mortgage after NOI. Income taxes and depreciation are also excluded, they belong to the owner’s tax situation, not property operations.
What operating expenses do new investors most often forget?: Vacancy and collection loss, turnover make-ready costs (paint, cleaning, small repairs between tenants), property management (even if self-managing today), rising insurance premiums, and lumpy maintenance like water heaters and appliances. Individually small, together these commonly add 15% to 25% of gross rent, exactly the gap between a pro forma that looks great and a property that breaks even.

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