What Is a Break-Even Ratio?

A break-even ratio is used to determine the occupancy level a property must reach or maintain to cover operational expenses and/or debt service, or to “break even.” Many investors and lenders consider it to be an important apartment investing calculation.

Investors typically utilize this metric for strategic  purposes, while lenders are generally more interested in utilizing the knowledge for risk mitigation. Often in a loan transaction, a lender will set a break-even ratio requirement, but the requirement will vary, depending on the lender and property. Generally speaking, a ratio under 85% is optimal.

Break-Even Ratio Calculator

Plug your figures into our break-even ratio calculator below. Not sure about what each figure means? Keep reading below for more details.

Break-Even Ratio Formula

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

Calculating the Break-Even Ratio

In comparison to some of the other popular metrics used in commercial real estate investment, the break-even formula requires more than a couple simple figures to be calculated. In order to accurately execute the formula, an investor should first gain a clear understanding of the variables utilized. The break-even ratio formula considers:

• Debt service: Payments towards the loan on the property

• Operating expenses: The yearly costs of managing income-producing properties, including marketing, insurance, taxes, utilities, maintenance, accounting, legal, trash collection, etc.

• Gross operating income: The gross potential income of the property after losses are subtracted

Going into great detail is a critical factor in ensuring your break-even calculation is accurate. Once the figures are determined, the rest is as simple as applying the formula. To calculate the break-even ratio of a property, these are the steps to be taken:

1. Add the operating expenses to the debt service

2. Subtract any reserves

3. Divide that result by the gross operating income

The resulting figure, once converted into a percentage, is the break even ratio.