Break Even Ratio: How Much Rent Can Fall Before You Lose Money

Break even ratio is the share of your gross rent that goes to operating expenses plus the loan payment. At 85%, rent could fall about 15% before you stop covering your costs. Lower is safer.

The formula

Break even ratio = (Operating expenses + debt service) / Gross rent

An example

A property collects US$17,400 a year in rent. Operating expenses are US$6,752 and the mortgage is US$9,576 a year.

(6,752 + 9,576) / 17,400 = 0.938

A break even ratio of 93.8%. Rent could only fall about 6% before the property stops covering itself. That is tight. A single month of vacancy in the year would push it under.

Compare a property where expenses and debt total US$13,900 against the same US$17,400 rent: 80%, meaning rent could drop a fifth and still cover costs.

What lenders look for

Many lenders want to see break even ratio under 85% on an investment property. Above that, the margin for a rent dip or an unexpected repair is thin enough that the loan starts to look risky to them too.

It is a useful sanity check even when no lender is asking, because it reframes the question. Cash flow tells you how much you make. Break even ratio tells you how much has to go wrong before you make nothing.

How to read it

Ways to improve it

A larger down payment cuts debt service and the ratio with it. A lower rate does the same. On the income side, a property in a higher rent-to-price market starts from a better place.

Related reading

DSCR measures a closely related thing from the lender's side. The calculator gives you the expense and debt-service figures this ratio needs.