How Do You Calculate Break-Even Occupancy?
- Add up a year of operating expenses (taxes, insurance, repairs, management, utilities).
- Add the annual mortgage payments, principal plus interest.
- Divide by gross potential rent: the rent collected if every unit were leased all year.
Worked Example
A $450,000 rental leases for $3,800/month, or $45,600/year at full occupancy. Operating expenses run $950/month ($11,400/year). With 25% down, the $337,500 loan at 6.5% over 30 years costs about $2,133/month ($25,598/year).
Break-even occupancy = ($11,400 + $25,598) ÷ $45,600 = 81.1%
The property covers all costs as long as it collects at least 81% of potential rent, about $3,083/month. That leaves room for roughly 2.3 months of vacancy per year before cash flow turns negative.
What Is a Good Break-Even Occupancy?
- Under 75%: Strong. Survives a serious downturn or a long lease-up.
- 75–85%: The range most commercial lenders and experienced investors are comfortable with.
- 85–95%: Thin. One extended vacancy or an insurance increase wipes out cash flow.
- Over 95%: The deal depends on near-perfect occupancy. Renegotiate price or terms.
For comparison, stabilized U.S. multifamily typically runs in the mid-90s on occupancy. A break-even well below the market's actual occupancy is what gives a deal its margin of safety.
Break-Even Occupancy vs. DSCR
Both measure the same risk from different sides. DSCR asks how many times NOI covers the loan payment; break-even occupancy asks how much income you can lose before you can't pay it. A 1.25x DSCR deal with 5% vacancy and a 25% expense ratio has a break-even near 81%. Lenders quote DSCR; investors who have lived through a vacancy usually watch break-even.
What Is the Break-Even Rent?
Break-even rent is the same calculation expressed in dollars: monthly operating expenses plus the monthly mortgage payment. If market rent for the unit is below that number, the property needs a larger down payment, a lower price, or lower expenses to cash-flow.