What is the Break Even Ratio?

The break even ratio is an important apartment investing calculation utilized by both investors and lenders. It’s usage is in order to determine the occupancy level a property must reach/maintain in order to still cover operational expenses and or debt service.

Investors would obviously care to know this metric for strategic purposes. Lenders are more interested in utilizing the knowledge for risk mitigation. Typically, a lender will set a break even ratio requirement of 85% or less. Truthfully, the actual break even ratio requirement will vary depending on the lender and property, but generally speaking, a ratio under 85% is considered optimal.

Calculating the Break Even Ratio

Break Even Ratio Calculator

In order to both understand as well as actually execute the formula, you would first need a clear understanding of the variables that comprise it. The break even ratio formula considers:

• The property’s debt service: Payments that are made towards reimbursing the interest and principal of a property loan.
• The property’s operating expenses. The yearly costs of managing income producing properties. Including: marketing, insurance, taxes, utilities, maintenance, accounting and legal, trash collection, etc.
• The property’s gross operating income. The result of subtracting all vacancy losses and credit losses from the gross potential income of the property.

Once all the components are known and calculated, the rest is pretty simple. In order to calculate the break even ratio of a property, you would add the operating expenses to the debt service, subtract any reserves, and finally divide that result by the gross operating income.

Break Even Ratio= [(Operating Expenses + Debt Service)- Reserves]/ Gross Operating Income