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How It Works
The break-even ratio tells you what percentage of a property's gross income is consumed by operating expenses and debt payments. If income drops below this threshold, the property cannot cover its obligations.
Lenders use BER as a risk screen. A ratio below 85% is generally considered safe because the property can absorb a 15% income decline before running into trouble.
Example Problem
An apartment building has $48,000 in operating expenses, $36,000 in annual debt service, and $120,000 in gross operating income.
- Add expenses: $48,000 + $36,000 = $84,000
- Divide by income: $84,000 / $120,000 = 0.70
- Multiply by 100: 70%
At 70%, this property has a comfortable 30% cushion before it fails to cover costs.
Frequently Asked Questions
What is a good break-even ratio for rental property?
Most lenders want a BER below 85%. A ratio of 70% or lower is considered strong because the property can withstand significant vacancy or rent reductions before losing money.
How is BER different from the debt coverage ratio?
BER measures the percentage of income consumed by all obligations, while DCR focuses specifically on the ratio of net operating income to debt service. A DCR of 1.25 means NOI covers debt payments by 25%.
Does BER include vacancy losses?
BER uses gross operating income, which already subtracts vacancy and credit losses from gross scheduled income. If GOI is $100,000 with $10,000 in vacancy losses, the GSI was $110,000.
Related Calculators
- Debt Coverage Ratio Calculator — assess a property's ability to cover debt payments.
- Net Operating Income Calculator — compute NOI from operating income and expenses.
- Operating Expense Ratio Calculator — measure operating efficiency.
- Vacancy and Credit Loss Calculator — estimate income loss from vacancies.
Reference: Gallinelli, Frank. What Every Real Estate Investor Needs to Know About Cash Flow. McGraw-Hill Education.