Break-Even Point

The break-even point is where income exactly covers costs, with no profit or loss. For a rental it is usually expressed as break-even occupancy: operating expenses plus debt service divided by gross potential rent. The cap rate tells you income on price; the break-even tells you how much can go wrong.

The example property needs about $16,700 of operating expenses and, with a 75% loan at 7.25%, about $30,700 of debt service. Together that is about 99% of its $48,000 gross potential rent. Almost any vacancy puts it below break-even.

Without a loan, break-even occupancy is only about 35%. The same property can be very safe or very fragile depending on financing. Lenders look at this through the debt service coverage ratio, which asks the same question from the other direction.