Definition

Break-even occupancy

Break-even occupancy is the occupancy at which annual pre-tax cash flow is exactly zero — the share of gross potential income the property must collect to cover operating expenses and debt service with nothing left over. It is the cleanest single measure of how much slack a deal has: the lower the figure, the more vacancy the property can absorb before it costs you money each month.

Break-even occupancy = (occupancy-independent expenses + debt service) ÷ (gross potential income × (1 − management %))

Worked example

The duplex carries $9,270 of expenses that do not move with occupancy — taxes, insurance, utilities and the maintenance and CapEx reserves — plus $15,469 of debt service. Management takes 8% of whatever is actually collected, so every dollar of potential income only contributes 92 cents toward the bill: $24,739 ÷ ($32,700 × 0.92) = 82.2%. Set vacancy to 17.8% in the analyzer and cash flow lands on zero.

Every example in this glossary uses the same deal: a $265,000 duplex renting for $2,650 a month, bought with 25% down at 6.75% over 30 years, producing $19,310 of net operating income.

The mistake to avoid

Using the shortcut (operating expenses + debt service) ÷ gross potential income. It charges the management fee as though the building were full, which it will not be at the break-even point, and so overstates the figure — 83.3% instead of 82.2% on this deal. The error grows with the management percentage, and it flatters nothing: it makes a deal look more fragile than it is, right when you are deciding how much leverage to take.

Where this is calculated

The rental property calculator computes this from your own numbers and shows the arithmetic expanded. The full underwriting model: NOI, cap rate, cash-on-cash, DSCR, amortisation, a 30-year projection and a printable deal report.

Related terms

Back to the full glossary — 20 terms with formulas and worked examples.