Question

In order to operate an income property and collect rents, it is necessary to incur certain expenses. What are operating expenses?

a. The total income generated by the property.
b. The periodic expenditures necessary to maintain the real estate and continue production of effective gross income.
c. Expenses that vary with the level of occupancy.
d. The costs associated with purchasing the property.

Answer 1

Operating expenses are the periodic expenditures needed to maintain a property and generate income, such as maintenance, management, taxes, and utilities, which are essential for profit-making through rent collection.

Step-by-step explanation:

Operating expenses are b. The periodic expenditures necessary to maintain the real estate and continue production of effective gross income. These include costs such as maintenance, repairs, property management fees, insurance, property taxes, and utility expenses. Operating expenses are crucial for keeping the property functional and habitable, which enables the collection of rents. They are distinct from the costs associated with purchasing the property, and they can sometimes vary with occupancy levels, but are part of what is needed to make a profit from an income property.

While renting can sometimes appear cheaper than buying, renters typically do not build equity in the property. Furthermore, fixed costs such as rent remain constant regardless of the income produced by a business operating within a leased space. Price ceilings can sometimes lead tenants to face lower housing quality since they might lead landlords to reduce spending on maintenance and essentials.