Break Even Ratio Calculator

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

  • Break-Even Ratio
    is 1.3
  • Lenders will look for a break even ratio of 85% or less

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

Why Use the Break Even Ratio

Lenders set a break even ratio minimum in order to assess possible risk in financing an apartment property transaction. A minimum break even ratio of 85% means the total rent collected at an investment property can drop by 15% and the borrower would still technically be able to cover all of the bills. All things considered, an apartment that fits those parameters is considered a good investment.

For example, if the break even ratio for a property is 95%, there are a few glaring issues to consider. An investor or lender may be reluctant to agree to the financing of such an acquisition because of the high occupancy required to cover operational expenses. It’s not uncommon for occupancy levels to drop below 90% regardless of market tier or location, especially during times of economic distress.

Conversely, if the break-even ratio of a property is 75%, then the deal may seem much more appealing to an investor or lender. After all, a break even ratio of 75% suggests that even during a worst case scenario of a 25% vacancy rate, the property owner would still be collecting enough in rent to cover operational expenses and debt service.