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Break-Even Ratio
The percentage of gross income needed to cover operating expenses and debt service.
Definition
The break-even ratio (also called the break-even occupancy rate) measures the minimum occupancy a property needs to cover all expenses and debt payments. It is calculated by dividing the sum of operating expenses and debt service by gross potential income. A break-even ratio of 85% means the property needs to be at least 85% occupied to avoid negative cash flow. Lenders use this metric as an additional risk measure — lower is better. Most lenders prefer a break-even ratio below 80-85%. It is particularly relevant for multifamily properties where partial vacancy is common.
How This Relates to DSCR Loans
Break-even ratio complements DSCR by showing how much occupancy cushion exists. A low break-even ratio means the property can weather vacancy without defaulting.
Related Terms
Vacancy Rate
The percentage of time a rental property is unoccupied and not generating income.
NOI (Net Operating Income)
A property's total income minus operating expenses, before debt service and taxes.
DSCR (Debt Service Coverage Ratio)
A ratio that measures whether a property's rental income covers its debt payments.
Operating Expenses
The ongoing costs of running a rental property, excluding mortgage payments and capital improvements.
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