Break Even Ratio

By Juan Cabrera, MBA realbench.net
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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?

Break Even Ratio

Example

Monthly Rent  $1,800
Vacancy Rate  3%
Monthly Mortgage Payment  $1,200
Total Annual Expenses  $3,000

Steps

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
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
STEP 5: Apply Formula

($14,400 + $3,000)
Break Even Ratio = --------------------------------------
$20,952

Break Even Ratio = 83.05%

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ARTICLE CATEGORY:
Break Even Ratio, Real Estate Break Even Ratio,ber,Investment Break Even Ratio

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