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The Break Even Ratio is an indicator used by lenders when underwriting
real estate investment properties, its purpose is to estimate how vulnerable
a real estate investment property is to defaulting on its debt should rental income decline.
The lower the Break Even Ratio the better for the real estate investment property;
the Break Even Ratio typically ranges between 70% and 100%.
Most lenders look for a Break Even Ratio of 85% or less.
How to calculate the Break Even Ratio?
Example
| Monthly Rent | $1,800 |
| Vacancy Rate | 3% |
| Monthly Mortgage Payment | $1,200 |
| Total Annual Expenses | $3,000 |
Steps
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STEP 1: Calculate Gross Annual Income Gross Annual Income = Monthly Rent * 12 Gross Annual Income = $1,800 * 12 Gross Annual Income = $21,600 |
STEP 2: Calculate Annual Mortgage Payments Annual Mortgage Payments = Mortgage Payment * 12 Annual Mortgage Payments = $1,200 * 12 Annual Mortgage Payments = $14,400 |
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STEP 3: Calculate Vacancy and Credit Loss Vacancy and Credit Loss = (Gross Annual Income * Vacancy Rate)/100 Vacancy and Credit Loss = ($21,600 * 3%)/100 Vacancy and Credit Loss = $648 |
STEP 4: Calculate Gross Operating Income Gross Operating Income = Gross Annual Income - Vacancy_Credit Loss Gross Operating Income = $21,600 - $648 Gross Operating Income = $20,952 |
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STEP 5: Apply Formula
Break Even Ratio = 83.05% |
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ARTICLE CATEGORY:
Break Even Ratio, Real Estate Break Even Ratio,ber,Investment Break Even Ratio
Break Even Ratio, Real Estate Break Even Ratio,ber,Investment Break Even Ratio
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