How break-even occupancy works
Break-even occupancy is the share of your rent roll you must collect to pay every operating bill and the mortgage. Below it, you add money from your own pocket. Above it, the building cash flows. The formula, often called the break-even ratio, is:
break-even occupancy = (operating expenses + annual debt service) ÷ (gross potential rent + other income)
- Gross potential rent is every unit rented all year at its asking rent: units × monthly rent × 12.
- Operating expenses are the costs of running the property: taxes, insurance, repairs, management, owner-paid utilities and a reserve for replacements. Following the OCC's definition of net operating income, they do not include loan payments, depreciation or income taxes.
- Debt service is 12 months of mortgage payments (principal and interest, or interest only).
From that one ratio the tool also works out:
- Max vacant days per unit = (1 − break-even) × 365. Spread across the building, that is how many days each unit can sit empty a year.
- Vacant months for a single-family rental = (1 − break-even) × 12. With one unit, that is how long the house can sit between tenants.
- Minimum rent for your cushion: the rent per unit that puts break-even a chosen number of points below your expected occupancy.
Worked example
A four-unit building rents for $1,800 a unit, plus $1,200 a year from laundry. Operating expenses are $32,000 a year. The loan is $450,000 at 7% over 30 years.
| Item | Per year |
|---|---|
| Gross potential rent (4 × $1,800 × 12) | $86,400 |
| Other income | $1,200 |
| Total potential income | $87,600 |
| Operating expenses | $32,000 |
| Debt service (7%, 30 years) | $35,926 |
| Break-even occupancy (67,926 ÷ 87,600) | 77.5% |
The building can lose 22.5% of its potential rent before it stops covering its costs: about 82 vacant days per unit a year. At 95% expected occupancy, the cushion is 17.5 points and cash flow is about $15,350 a year. To keep a 10-point cushion, rent could fall as low as about $1,640 a unit.
What a higher rate does
| Rate | Debt service | Break-even |
|---|---|---|
| 7% | $35,926 | 77.5% |
| 8% | $39,623 | 81.8% |
| 9% | $43,450 | 86.1% |
| 10% | $47,389 | 90.6% |
Three points on the rate pushes break-even from 77.5% to 90.6%, leaving only 4.4 points of room at 95% occupancy. If you have an adjustable-rate loan, a balloon or a refinance coming, this table is the one to watch.
Edge cases
- Above 100%: the property loses money even fully rented. Cut costs, raise rent or put more down.
- Free and clear: set debt service to $0 to see the operating break-even alone.
- The tool treats expenses and other income as fixed. Some costs drop when units are empty, so your true break-even may be slightly lower. Rent you bill but never collect still counts as vacancy.
What to do next
Check whether a lender will finance the deal with the DSCR calculator, see month-by-month results in the rental cash flow calculator, and compare the price with the cap rate calculator. For how rental income is taxed, read rental income taxes for small landlords.