Break-Even Occupancy Calculator
Break-even occupancy is the share of a property's potential income it must collect to pay all operating expenses and the mortgage. Enter the rent roll, expenses and loan to see the break-even point and how much room you have above it.
Margin of safety
Worked example
A 12-unit building with $1,000 average rent and $300 a month of other income has gross potential income of $147,600 a year. Operating expenses are $60,000 a year.
The $900,000 loan at 7% over 30 years costs $5,988 a month, or $71,853 a year. Together, expenses and debt service come to $131,853.
Break-even occupancy is $131,853 / $147,600 = 89.3%. At the current 95% occupancy, the building has a cushion of 5.7 points, which means it can carry about 1.3 empty units before it stops covering its costs.
What break-even occupancy tells you
Every rental has costs that do not go away when a unit is empty: property taxes, insurance, the mortgage and much of the maintenance. Break-even occupancy is the point where collected income exactly covers those costs plus the loan payment. Above it the property makes money. Below it you are writing checks to keep it running.
The gap between current occupancy and break-even is your margin of safety. A building at 95% occupancy with an 89% break-even can absorb a rough patch. A building at 95% with a 93% break-even cannot.
The formula
Break-even occupancy = (operating expenses + annual debt service) / gross potential income.
- Gross potential income is every unit at its current rent for twelve months, plus other income such as laundry and parking.
- Operating expenses are annual taxes, insurance, repairs, management, utilities, reserves and other running costs. Enter them in dollars.
- Annual debt service is twelve monthly principal and interest payments.
This version treats expenses as fixed. In reality, a few costs such as management fees fall a little when collections fall, so the true break-even is slightly lower than shown. That makes the number here a conservative estimate.
What is a good break-even occupancy?
Lenders and experienced investors generally like to see break-even occupancy of 85% or lower for apartment buildings, which leaves room for a recession, a big employer leaving or a wave of turnover. Above 90% the property is fragile: a few move-outs or one slow leasing season can wipe out cash flow.
Compare break-even with the occupancy the local market has actually sustained over several years, not just today's rate. If the submarket has dipped to 88% in past downturns and your break-even is 90%, plan for negative months.
How to lower it
Break-even occupancy falls when income rises or costs fall. Raising below-market rents, adding other income, cutting wasteful expenses, borrowing less or refinancing to a lower rate or longer amortization all help. Lenders measure a closely related idea with the debt service coverage ratio: a property with a high DSCR also has a low break-even occupancy.
For an itemized expense total to enter here, use the NOI calculator. To check the price, run the same rent roll through the cap rate calculator.
Stress-testing a deal with break-even occupancy
Break-even occupancy is most useful when you push on it. Before you buy, run three versions of the same deal:
- Today's numbers: current rents, actual expenses and the loan you plan to take.
- A rate shock: if the loan is adjustable or will be refinanced in a few years, raise the interest rate one or two points and see how far break-even climbs.
- An expense shock: add 10% to operating expenses for a tax reassessment or an insurance renewal, which have both risen sharply in many markets.
If break-even stays comfortably below the occupancy the neighborhood has sustained in past downturns in all three versions, the deal can survive a bad year. If one of them pushes break-even above 90%, plan for more cash reserves or negotiate a lower price.
Frequently asked questions
How do you calculate break-even occupancy?
Divide operating expenses plus annual debt service by gross potential income. $131,853 of expenses and debt service on $147,600 of potential income is a break-even occupancy of 89.3%.
What is a good break-even occupancy for an apartment building?
Many lenders and investors want 85% or lower. Above 90%, a few move-outs can push the property into negative cash flow.
Does break-even occupancy include the mortgage?
Yes. Unlike NOI, break-even occupancy includes debt service, because the goal is to know when the property stops covering all of its cash costs.
How is break-even occupancy related to DSCR?
Both compare income to debt. A higher DSCR means more income above the loan payment, which means a lower break-even occupancy and more cushion.
Why use occupancy instead of vacancy?
Occupancy is how lenders and property managers report performance, and it is easier to compare directly with the break-even point. 95% occupancy is the same as 5% of units or income lost to empty units.
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Results are estimates for education only, not financial, tax or legal advice. Check numbers with your lender and advisors before you buy.